Focus: Dawn of a new age?

The financial crisis has made investors reconsider what they pay for their money to be managed, or so goes the argument. Recent market falls revealed that what marketing departments had sold as alpha was in fact beta or beta plus at best. So why not just pay for beta and have reliably second-quartile returns?

This view has been compounded by the Retail Distribution Review (RDR). Providers argue that the low commission paid to advisers has historically held trackers back. However, if commission is banned, as the FSA proposes, this obstacle is removed - paving the way for rapid expansion.

Together, these are strong arguments: the combination of surging client demand and transparent distribution could be a powerful engine of change. But there are also significant barriers, not least ingrained adviser habits and consumers' natural tendency to look only at the top quartile – even if the figures are historical. Another obvious but overlooked point is that not everyone can be passive: the efficiency of the capital markets relies on a universe of active participants to drive prices.

Is there any firmer basis for believing the tracker providers’ sales patter – that the future is indexed?

One way of exploring the UK market outlook that does not rely entirely on strategic guesses is to look at the US. The US investment marketplace is the most mature in the world, and its investors the most financially articulate. Innovations such as hedge funds, 130/30 - and the mutual fund itself – were born in the US, before being imported first to the UK, then to continental Europe.

Tom Rampulla, managing director of Vanguard Investments UK, says the US retail market share of tracker funds was 10.5 per cent at the end of 2008. While this is relatively low, it has grown substantially over the past decade. During the 1990s, market share rose from 3 per cent to 5 per cent - roughly their share of the total asset pie in the UK now.

Distribution has been crucial to this shift. Mr Rampulla reports that 65 per cent of IFAs in the US are now fee-based, up from 9 per cent a decade ago. He says the trend is not due to direct regulation, as the FSA proposes in the UK, but to heavy sanctions imposed on firms where conflicts of interest are discovered. He also notes that the firms themselves wanted more regular income flows. "People talk about being addicted to the drug of commission – they wanted to get rid of that," he explains.

Arguably, the move into passive products could happen faster in the UK because the transition to fee-based advice would be more abrupt. The market conditions could also be right - Mr Rampulla attributes the growth of the US tracker market to the dotcom crash, as well as to the changing adviser business model. The experience of 2008 has been, if anything, more traumatic for investors.