Michael Green quit this weekend. Five years at Simplify, a firm he joined when it ran about $200m and leaves at roughly $14bn, and he’s off to found Tier1 Alpha Asset Management, where he’ll be CEO and CIO and charge you more than an index fund does.
Twenty-two pages of explanation came with the resignation. One sentence held me:
“Markets cannot indefinitely free-ride on information nobody is being paid to produce.”
Put some numbers round that. The ICI’s May figures have indexed mutual funds and ETFs at $21.82tn against $18.75tn still in active hands, with index vehicles holding something like 57% of American equity fund assets. Asset-weighted, index equity mutual funds charge 5 basis points and the ETFs 14. And Chinco and Sammon reckon the true passive ownership share of the US market is roughly double the number the industry quotes about itself.
So, the naive question. The one nobody in a marketing department wants asked.
Who is being paid to work out what a company is worth?
That work costs money. Analysts, models, arguments, travel, the odd useful lunch, and the peculiar willingness to be wrong in public for two years before you turn out to be right. In 1985 the industry billed 100 basis points and upwards for it, and a fat slice of that money — wastefully, greedily, often very badly indeed — went into producing an opinion about price. The bill today is 5.
Nobody voted for it. Every household made an individually sensible decision and the aggregate did what aggregates always do.
Here’s the tell, though. Fama and French formalised size and value and Dimensional turned it into a powerhouse. Rob Arnott’s fundamental indexation became RAFI, peaked at $480bn of licensed assets, and went to TMX in June for $490m after losing half of it. The industry has been converting academic findings into firms for 40 years. Hundreds of papers now document what mechanical ownership does to prices, liquidity, elasticity and index membership — and not one firm was ever built on them. Follow the money and you’ll see why. The institutions with the scale to commercialise the insight are precisely the institutions that need the benchmark left unquestioned.
There’s a legal ratchet underneath it too. The Department of Labor’s 2024 fiduciary rule never took effect and was vacated in March, restoring the five-part test that’s governed since 1975. But its direction of travel had already done the work: when two products sit in the same box, the cheaper one is easier to defend in front of a plaintiff’s lawyer. So the question what if the dearer product is better? quietly stopped being asked, because asking it created a paper trail. Cost became a legal defence. Value became somebody else’s problem.
Now watch what that does downstream.
Money arriving in a cap-weighted fund asks nothing; it buys in proportion to what’s already big. Payroll contributions land on the 1st and the 15th. Target-date funds rebalance to a calendar. Redemptions sell pro rata, regardless of whether the thing being sold is cheap. Those flows are mechanical, published in advance, and they now set the marginal price.
Which changes what it’s rational for the remaining humans to do.
Green is honest about this, and it’s the most uncomfortable passage he’s written. Faced with a large, predictable, price-insensitive buyer, the rational manager stops estimating what a company is worth and starts estimating what the machine must buy. And then he buys it first. The arbitrageur who used to trade against the distortion now trades with it, and in doing so makes it bigger. Tier1’s flagship will hold much the same names as the benchmark and tilt towards the ones where measured passive demand is heaviest against available liquidity.
He’d tell you the same, to be fair; his stated research agenda asks “how can we be wrong?” before it asks anything else, which is more intellectual honesty than the entire sell side manages in a decade. He’s found something real, and he’s right that capitalism pays the man who converts being right into something you can actually buy.
But run the chain one more link. If the money that used to be paid for disagreement is now paid for anticipation, then every professional in the market is leaning on the same rail.
That’s a fractal problem. In a Gaussian world you get a tidy spread of opinion round fair value and the occasional outlier, which is the world your adviser’s software still believes in. In the world we actually inhabit, correlated positioning clusters the volatility and fattens the tail, and the tail arrives a great deal faster than your intuition allows for. When the flows turn — demographics, decumulation, a redundancy cycle, a bad quarter for confidence — the mechanical seller sells at any price it’s offered, and the species that used to stand underneath the market with a valuation and a bid has been defunded for 20 years.
The flow runs the other way…rapidly.
Which brings me to the tolls, and the best thing in Green’s essay. Legitimate fees pay for research, judgment, risk-bearing and scarce capacity. Rents monetise captivity. Tier1 says it won’t pay shelf fees, placement fees or platform-access tolls to buy distribution, and won’t run that tollbooth itself.
Then he does something braver and points at Vanguard. In 1977 Bogle killed an 8.5% front-end load and put every dollar of the client’s money to work, because he could reach investors directly and could therefore afford to refuse. In 2003 the same firm patented the ETF share-class structure and sat on it alone for 20 years; funds using it booked around $191bn of gains through 2019 while distributing next to nothing taxable. Everybody else’s investors paid for that exclusivity in capital gains they needn’t have realised. A dozen managers filed within months of the patent expiring in May 2023. Meanwhile the 2020 move to open cheaper institutional target-date funds to small plans forced the selling that landed a historic tax bill on the retail investors who stayed put — the smallest clients, the ones the firm was founded to serve. It settled with the SEC for $106m in January 2025.
No villain required. A sequence of individually defensible decisions, each one choosing the institution over the investor, taken by a firm grown too large for any single client to punish.
How accommodating.
So, what to do?
Nothing dramatic, and nothing I’d dress up as advice. Two things worth sitting with.
If your core holding is a cap-weighted index fund, you own a bet on flows. It’s been a magnificent bet for 15 years and the weight of evidence skews towards it staying that way while contributions comfortably exceed redemptions. Just know that’s the bet you’re running, know what would end it, and know where you get off before you need to, because the edge is the exit.
And 5 basis points is the price. The cost is fragility, billed later, in a market where the marginal buyer is mechanical, the marginal analyst is unemployed, and everyone clever is pointed the same way. That invoice doesn’t itemise.
Green wants readers to make demand visible by asking their advisers for access to his strategies. I’d ask something cheaper and ruder of you. The rest of the industry will happily take the coin for the crossing; don’t pay the ferryman until you’re on the other side.
Pull up whatever sits at the dead centre of your portfolio, and ask who, exactly, is being paid to know what it’s worth.
Anyone?
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