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I saw this on the back page of today’s Wall St Journal.
“On this day in 1971, Wells Fargo launched the world’s first stock-index fund. One mutual-fund manager’s reaction: “If people start believing this random-walk garbage and switch to index funds, a lot of $80,000-ayear portfolio managers and analysts will be replaced by $16,000-a-year computer clerks. It just can’t happen.”
The 1971 view is obsolete. There is no need for a computer clerk.
Harold well said. I have taken care of all investments since I was 18 years old. At 80, my best investments except for Apple stock, has been the index VOO, the S&P 500. So happy my education, and reading investment books, along with Humble Dollar helped get me to a good place.
In the 70’s, it was index funds.
In the 2010’s – 2020’s, in 401k/403b plans, advisors never had a foothold and the battle is being won by target date investments.
60+% of all 401(k) plan participants hold at least some investments in target-date funds (TDFs), For plans administered by Vanguard, that specific participant adoption rate sits even higher at roughly 85% due to automatic enrollment policies. Target Date Investments now represent about 40% of all 401k assets, approaching $4 Trillion!
In many (perhaps most) plans, the target date fund is delivered as a separate investment choice, resulting in a “mixed use” outcome within the plan. For most workers, whose only liquid assets are in their employer-sponsored plan, that is suboptimal. For the minority who have assets in multiple plans, in IRAs and taxable accounts, “mixed use” is the natural result – where asset decisions are not effectively coordinated.
In the 2030’s, assuming ERISA litigation continues at its current pace, expect to see target date investments increasingly limit allocations to index investments. Once target date investment managers and plan sponsors become savvy about transparency and decumulation (they are not there yet), expect to see plan sponsors increase use of asset retention, account consolidation and asset aggregation strategies coupled with target date investment allocations.
Today, ~55% of all 401k plans have an asset management service, 80+% among large/jumbo plans. However, only ~8% of participants use that service. Typically, managed account services focus solely on the assets in the plan (it typically isn’t a holistic financial planning service, including, for example, social security claiming decisions), and they seldom offer investment advice that is substantially better than a properly designed, low cost, target date investment.
In recent litigation, Plaintiffs argue that if a managed account fails to use personalized data like outside assets, salary, or risk tolerance, charging extra fees breaches ERISA prudence rules.
Once plan sponsors have 5 – 10 years of usage and cost data regarding managed accounts, the number offering the service and their use will likely decline … Instead, expect to see plan sponsors adopt target date investments that are hyper-personalized, hyper customized based on:
While service providers increasingly try to merge retirement savings with wealth management, expect managed account/active management to be much more concentrated among only those who have accumulated significant assets/a lifetime of savings.
Harold, this is a great piece of history. I was confused at first because I wrote something similar a few months ago that said that Vanguard created the first index fund. Checking just now, it seems that Wells Fargo created the first Institutional Fund for their pension clients, and Vanguard created the first Retail Fund for average investors. Both noteworthy events. Thanks for sharing this.
Rick, thank you for explaining that! Bob
Mark Higgins in his 2024 book “Investing in U.S. Financial History” wrote the following about the development of mutual index funds –
By 1963, (Benjamin) Graham concluded (in “The Future of Financial Analysis”) that .. he (Graham) just knew with mathematical certainty that beating market averages was no longer a worthy endeavor for most analysts… More than a decade passed before several courageous innovators embraced Ben Graham’s warning by creating funds that replicated indexes…These included people like Rex Sinquefield, Eugene Fama, and William Sharpe…In 1975, Jack Bogle commercialized the concept for the mass market when his firm, the Vanguard Group, introduced its first indexed mutual fund on December 31, 1975.
Going a bit further back it should be noted that John Bogle’s 1951 Princeton senior thesis was about the mutual fund industry. Graham taught investment and security analysis from 1928 to 1956 at Columbia University. Warren Buffett was a student of Benjamin Graham at Columbia University in the early 1950s.
Hmm. Hardly something I would expect a fiduciary to say publicly, although I can certainly imagine they felt that way. By the way, using CPI that salary in 2026 dollars is about $659 000.
Harold, I love this! Still, even though index investing has made picking funds easier, financial service professionals are alive and well. One reason is that most people remain intimidated by the idea of doing their own investing, another is that financial planning involves much more than just choosing investments, and finally, many people need someone to talk them off the ledge when markets go south.
Managing our assets since the 70s has never interested my better half. Therefore, reluctantly, I eased over 50% of our liquid assets to a financial management group that I’ve followed since the mid-90s. Completely trustworthy and very successful over the intervening years, they’ll be able keep my wife’s living style comfortable long after I’ve left this mortal coil.
J, you have accomplished the most difficult part of the dilemma, which in my opinion, is finding that trustworthy and successful needle in the haystack.
I have a son and two son in laws that I’ve been sharing Indexing articles and knowledge with for years. They even know our actual success yet two out of the three still pay for financial managers.
All we can do is share knowledge, we can’t force anyone be comfortable enough to accept it
You made a valid point Dan. While I have not used one yet, it is possible I may need to do so at some point as I get older. And if my wife should survive me, she will definitely hire one.
Jack – this is why we use a financial advisor now. I review and evaluate every purchase and/or sale my FA makes. But I’m five years older than my wife, and we both have longevity on our sides. So whether I croak first or lose all my marbles, I want the investment philosophy and advice to follow the form that we’ve established in the here-and-now.
Notice that I said I may hire an advisor someday if or when needed? This assumes that I will recognize that time is approaching and have time to interview and hire someone. Life often does not work that way. And you answered my unasked question, that is “why pay someone now to do what I may need someday, but just not yet?” By working with your advisor now, you can reasonably expect that your advisor will continue to follow your preferred strategy in the future, with or without your oversight. Smart move.