Why Passive Funds Deserve a Place in Every Portfolio: From the Average Joe to the Ultra-Wealthy
There's an unspoken rule in the finance industry that the wealthier the client, the fancier you must dress up. I like to call this the "Fancy Suit Fallacy." One of my mentors used to say, “People in corporate wear suits to mask incompetence. They use style to hide a lack of substance.” In wealth management, the same “fancy suit” logic is applied to investment strategies.
Advisers often assume that ultra-high-net-worth clients need complex, high-fee strategies to achieve solid returns. But the truth? These opaque, intricate structures are often little more than a stylish cover for lacklustre performance. Evidence shows that straightforward, evidence-based strategies like index funds are not only effective but also remarkably well-suited to investors at any wealth level. So, let’s dig into why simplicity might be the best fit, even for those who can afford the fanciest suits.
So Why the Hang-Up on “More Complex” Strategies?
It’s baffling. You would think that the thing that should matter most in investing would be the actual return of your portfolio after costs. At Timeline, our pure passive Tracker strategy, designed to mirror global market returns, has delivered top-tier results. Our Tracker 100% Equity portfolio, with a cost of just 0.08%, has taken the top spot in the UK MPS rankings by both Defaqto and Morningstar over a 3-year period.1 Yet, despite this performance, there’s still a lingering belief that index funds aren’t “good enough” for High Net Worth (HNW) and Ultra High Net Worth (UHNW) clients.
After hearing this argument one too many times and wondering how to respond without stepping on too many toes, I turned to our professional community on LinkedIn. I hoped someone could offer a solid reason why index funds might be unsuitable for the ultra-wealthy.
The responses were... enlightening. Most pointed to perceptions around prestige and
exclusivity. Some comments were sarcastic (“Evidence-based investing just isn’t flashy enough”), while others leaned a little too hard into honesty, claiming that if it looks simple, it’s less appealing. It was eye-opening to see just how much investment choices are influenced by appearances and ego over actual performance.
One comment really stuck with me: “Maybe it’s just not fun to chat about on the golf course.” There’s a kernel of truth here. In some circles, index funds are dismissed as “too ordinary” for HNW clients, no matter how consistently they deliver. As one adviser put it, “If it looks simple or for the masses, it’s less appealing—no matter how solid the results”. That perception problem alone can make it hard for advisers to recommend indexing, even if it’s the option that is constantly delivering the best returns at the lowest cost.
Some suggested that it might be the heavy U.S. tilt in global market-cap passive funds that bothers certain clients, an argument that at least has a shred of merit. But even that can be debunked in seconds. Look at any credible active vs. passive research, like the much-loved (or much-hated, depending on your stance) SPIVA Scorecard.2 The findings are undeniable: even at a regional or sub-asset-class level, the vast majority of active managers fail to outperform their respective benchmarks.
Then, there was a comment that some managers prefer staying in the first or second quartile rather than hitting the top performance rankings because it supposedly signals they’re avoiding excessive risk. Now, I understand the caution around outsized risk, but let’s be candid. If you’re aiming for “average” returns without adding active risk, why not just invest in the index? By definition, the index is the average of all active decisions and represents the point in the market where supply and demand (or risk and return) are in equilibrium. And here’s the beauty of it all: over time, that approach has outperformed the majority of active
stock-pickers. So, if you’re chasing “average” to avoid risk, the solution is right there.
Finally, there was the gem that had me laughing out loud. One person noted that “wealthy, overcomplicating investors are doing a public service, laying down their returns so the everyday indexer can keep making their regular 7% p.a. Like how first-class air travel ends up subsidising economy.” The idea that overpaying for underperformance is some kind of noble sacrifice is farcical. Though I must admit, the person who wrote it is very much part of the converted, and they were pointing out just how ludicrous the idea truly was.
In the end, these responses exposed an uncomfortable truth: the resistance to index funds for HNW and UHNW clients often has more to do with appearances and protecting the high-fee world of active management than actual investment performance. For anyone genuinely focused on wealth preservation and steady growth, index funds should be a no-brainer. They offer broad diversification, low fees, and a transparent approach to capturing market returns. But in an industry obsessed with exclusivity, simplicity can be a hard sell, even when it’s the
best option on the table.
Even the Wealthiest Are Turning to Indexing
Here's some food for thought for those still doubting whether index funds suit UHNW clients. A closer look at family offices, the investment and administration arms of some of the wealthiest people on the planet, shows that index strategies aren’t just “acceptable”; they’re foundational. According to Fidelity’s 2023 Family Office Investment Study, roughly 45% of family office assets are in public equities, with 47% of these offices invested in direct indexing strategies.3 Within that 47%, direct indexing typically represents 20% of the portfolio, covering nearly half of their listed equity exposure.
Direct indexing is essentially a customised version of traditional indexing, where assets are tailored to fit specific client needs. This might include tax benefits or small adjustments to tilt the portfolio toward certain sectors or values. But at its core, the approach remains the same: broad, low-cost market exposure.
While active strategies still dominate family offices, most have shifted to a “core-satellite” approach. This is where index funds form the core of the portfolio, providing low-cost exposure to the global market, while active management is used sparingly for added nuance. The takeaway? If billion-dollar family offices are using index strategies as a cornerstone, the idea that millionaires need something “more complex” doesn’t hold water. These families see the value in simplicity, proving that indexing isn’t just for the “little guy.”
Warren Buffett’s Vote of Confidence for Index Funds
Speaking of wealthy folks who know a thing or two about keeping it simple, Warren Buffett naturally comes to mind. Buffett has thrown his support behind index funds several times throughout history. In 2013, Buffett famously instructed the trustee of his wife’s inheritance to allocate 90% of it to a low-fee S&P 500 index fund and the remaining 10% to short-term government bonds4. His reasoning? Over the long haul, simple indexing would provide better returns at a fraction of the cost of most active strategies.
But this wasn’t the first time Buffet came out supporting index funds. In 2007, he made a $1 million bet with Protégé Partners, a hedge fund firm, to show that an S&P 500 index fund would outperform a group of hedge funds over ten years.5 Buffett’s logic was straightforward: high fees and complexity would weigh down hedge fund returns, while the index fund would benefit from low costs and the steady growth of the broad market. And he was right. Over the decade, the index fund gained 125.8%, while the hedge funds averaged only 36.3%.
This bet became a landmark moment for passive investing, highlighting how, for most people, tracking the market is more rewarding than trying to outsmart it. Buffett’s win showcased the value of low-cost, hands-off strategies in delivering solid returns over time.
The Unspoken Conflict of Interest
With all these perks of index investing, you might wonder: if it’s so fantastic, why isn’t every investment pro shouting it from the rooftops? If index funds reliably deliver better returns at a lower cost, why do some advisers still nudge clients toward pricier, underperforming active strategies?
To get to the bottom of this, let’s turn to author and investment adviser Mark J. Higgins. He highlights a tricky conflict of interest in the industry. Investment managers can often pocket more by promoting high-fee active funds that come with commissions or revenue-sharing perks.
In his article, Higgins raises the million-dollar question: what if complex portfolio allocations, active managers, and alternative asset classes actually destroy value? Would advisers admit it to their clients?6
The tough reality is that if clients were better off with simpler portfolios, focusing on low-cost index funds and avoiding complex alternatives, the traditional investment model would struggle to stay relevant. It’s a brutal truth to confront, and this conflict of interest often skews judgement. That’s why many firms continue to position themselves as experts in asset allocation and manager selection, even if the evidence doesn’t fully support their claims.
A Final Thought
For advisers who genuinely want to put their clients first, maybe it’s time to rethink the obsession with complex portfolios and the relentless chase for “exclusivity.” We’ve seen that most times, a straightforward, low-cost strategy not only offers better results but also builds a more transparent, trusting adviser-client relationship.
Sources:
1 FT Adviser, DFM Insight: Top-performing growth portfolios revealed:
https://www.ftadviser.com/investments/2024/06/24/dfm-insight-top-performing-growth-portfolios-revealed/
2 SPIVA, S&P Dow Jones Indices: https://www.spglobal.com/spdji/en/research-insights/spiva/.
3 Fidelity, 2023 Family Office Investment Study.
4 2013 letter to shareholders.
5 Berkshire Hathaway Inc., Shareholders Letters: https://www.berkshirehathaway.com/letters/letters.html.
6 Mark J. Higgins, CFA, CFP, The Unspoken Conflict of Interest at the Heart of Investment Consulting: https://blogs.cfainstitute.org/investor/2024/01/25/the-conflict-of-interest-at-the-heart-of-investment-
consulting__trashed/.
Disclaimer
Timeline Planning is a product of Timelineapp Tech Limited. Registered in England. RC: 11405676. Timeline Portfolios is part of Timeline Holdings Limited (Company number 13266210) incorporated under the laws of England and Wales, and operates under the wholly owned regulated subsidiary Timeline Portfolios (Company number 11557205), which is authorised and regulated by the Financial Conduct Authority (firm reference number 840807).
This article has been created for information purposes only and has been compiled from sources believed to be reliable. None of Timeline, its directors, officers or employees accepts liability for any loss arising from the use hereof or reliance hereon or for any act or omission by any such person, or makes any representations as to its accuracy and completeness. This document does not constitute an offer or solicitation to invest, it is not advice or a personal recommendation nor does it take into account the particular investment objectives, financial situation or needs of individual clients and it is recommended that you seek advice concerning suitability from your investment adviser.
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