JOI: What do you think the smaller players—the boutique index providers that have ridden the ETF wave—need to do to survive?
Prestbo: Well, I would sure hate to be them now because what they need primarily is distribution. They don't have anybody else tooting their horn for them as the major index providers do; they don't have established customer bases—people saying, "Well, I always go with so-and-so." That's not happening with these little boutique index providers. The main thing they have to do is broaden their base, but they're trying to do it without any resources and that's a very difficult challenge.
It's easy to know what they have to do. They have to get bigger and more successful. But without people, without budget, I don't see how it's going to happen.
JOI: Where are costs headed for index licensees?
Prestbo: Down. It's the commission story all over again. Down, down, down.
JOI: When an investor is looking at an index-based product, what should they be looking for in the underlying index?
Prestbo: It depends on what they want to accomplish with it, as usual. That's the hard part, and that's the part that people like to skip over because it's hard. You actually have to think. But once you've established what it is you want to accomplish, then you look at the underlying index for representation of that market or market segment. You look to see if the rules are in place to keep it up to date and fresh. Is it once a year? Is it once a quarter? And you look to see if it is—and this is the hard part—solidly conceived and solidly maintained. Some of that you have to infer by looking at who's providing it: S&P, Dow Jones, MSCI, Russell? You infer that there is some muscle behind it. Joe Blow index fund? I don't know.