The Great Bifurcation is coming to money management and that’s bad news for closet indexers

Toronto's financial district. The emergence of the bank branch as a force in wealth management has fed the mushy middle.Peter J. Thompson/National Post files

Bifurcate (v): to divide into two branches or forks

I don’t usually use such big words, but this one fits nicely with what’s ahead in the investment world. Let me explain.

The wealth management industry is large and highly competitive, so there are always assets in motion. One of the biggest transitions will be the redistribution of what I call the “mushy middle.” That is, funds that purport to be actively managed, but instead closely follow an index. In the industry, they’re affectionately referred to as closet indexers or index huggers.

Indexing, of course, is a perfectly good strategy. Its main advantage is low cost. Unfortunately, closet indexers are not low cost. They charge a fee that suggests an active attempt to beat the index.