Brian is WMA & Founder of Duggan Wealth Management | Forbes 2026 Best-In-State Wealth Advisor (#76) & Best-In-State Wealth Management Teams.
There was a time when active management was not some niche corner of the investing world. Investors knew the big names in active fund management.
Then indexing became more common. It’s low cost, can offer broad diversification and is hard to mess up.
That shift did a lot of good. Mutual funds and index-based investing helped democratize the markets. They gave everyday investors broad access, professional management and a practical way to build wealth over time. That should not be dismissed.
But somewhere along the way, I believe many investors and advisors stopped making an important distinction. They stopped separating active management from the mutual fund wrapper through which active management was often delivered.
That matters, especially for wealth management firms serving clients whose balance sheets, tax situations and planning needs are no longer simple. A lower-cost vehicle is not always the right vehicle.
That is especially true for affluent investors, executives and business owners whose portfolios may include concentrated stock, large embedded gains, complex tax exposure or a need for more customized fixed-income solutions. In those cases, the real question is not just what costs less on paper—it is which tool best fits the job.
Research on mutual fund flows and performance helps explain why this matters. Capital tends to chase perceived skill. The problem is that success can attract scale, and scale can make it harder for active managers to deliver the same edge that investors came looking for in the first place.
Why Mutual Fund Structure Still Matters
A mutual fund is a pooled vehicle. If redemptions rise, holdings may need to be sold to raise cash. Those decisions are not always driven by the manager’s best ideas. Often, they are driven by the behavior of the shareholders in the fund. If enough people head for the exit, everyone still inside can feel it.
Research on asset fire sales showed how mutual fund inflows and outflows can create price pressure in underlying securities, which helps explain why the pooled-fund wrapper itself can affect outcomes for the investors who remain. A separate line of research on fund size made a related point. Larger funds can face real performance headwinds, especially in less-liquid parts of the market where flexibility matters more.
The lesson of the past 20 years was supposed to be that costs matter, discipline matters and not every active strategy deserves blind trust. Instead, many people seem to have landed on the conclusion that if indexing works well, active management must not be worth the trouble. That is too simplistic.
Understanding Separately Managed Accounts
That is where separately managed accounts, or SMAs, deserve more attention and could be worth discussing with those clients who have more complex portfolio needs.
An SMA is not a shared pool of money. It is an individually managed account. If two investors use a similar strategy and one decides to sell, that does not trigger a redemption inside the other investor’s account. That does not remove market risk, but it does remove one layer of friction that can come from being part of a pooled vehicle.
SMAs are not just about active stock picking. They can also be used for direct indexing, which can allow for customization, precise tax-loss harvesting and better coordination with an investor’s broader financial life. That can be especially useful when dealing with concentrated positions. A client with substantial company stock and large embedded gains may need a strategy designed to reduce single-position risk over time without creating an unnecessary tax event just to check the diversification box.
The same goes for fixed income. Bond indexing generally follows market-cap weighting, which means the biggest borrowers often receive the biggest representation in the index. An individual bond SMA could allow for more deliberate credit selection, maturity management and cash flow design, rather than accepting the allocation that comes with the index by default.
Where SMAs Have Limits
SMAs also come with trade-offs, and advisors should say that part out loud. They can involve higher minimums, more moving parts and greater operational demands than a simple exchange-traded fund (ETF) or mutual fund allocation.
Taxes require more coordination. Portfolio management requires more oversight. And if a firm is going to use SMAs well, it needs a repeatable process behind them. This should not be complexity for complexity’s sake.
The goal is not to bolt on sophisticated-looking tools simply because a client has more zeros on the statement. The goal is to build a scalable process that explains why a given tool is being used, what problem it is solving and how it fits within the broader portfolio.
What This Means For Wealth Management Firms
If firms lose the plot on active management because indexing has become the default answer, they risk overlooking tools that may be a better fit for affluent clients. That includes clients with concentrated positions, business sale proceeds, executive compensation issues, substantial taxable assets or a need for more tailored risk management.
The answer is not to throw out ETFs, mutual funds or low-cost index exposure. Those tools still matter. But as wealth grows, the menu should expand. Taxes matter more. Concentrated positions matter more. Customization matters more. The investor building a first portfolio and the investor managing a large taxable balance sheet are not solving the same problem. They should not automatically be handed the same tool and told the conversation is over.
Active management should not be avoided on principle. Under the right conditions, in the right structure and for the right client, it may still offer real value. And when a client’s portfolio has grown, their tax picture has become more complex or their planning needs now go beyond basic market exposure, this is the real call to action for wealth management firms:
Ask whether you are recommending the right structure for the job.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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