Advisors Using Active Strategies

June 17, 2019

[This article appears in our July 2019 issue of ETF Report.]

This may be the year that passively managed funds garner half of the U.S. equity fund market share.

Morningstar data shows that as of the end of 2018, U.S. equity funds represent 51.3% of market share versus 48.7% for their passive counterparts, and Morningstar expects the market share to even out between the two in 2019.

The trends may be solidly in favor of passive strategies, but not every financial advisor is joining Team Passive. Advisors who use active management strategies say they prefer them to passive for their high net worth and retired clients. Some like to use active strategies to capture outperformance, while others say active management can mitigate downside risk.

These advisors also believe active strategies still have the edge in certain markets, such as in fixed income, international markets and small cap stocks. It also doesn’t mean these financial advisors completely shun passive strategies. They may use them for younger clients accumulating wealth or those with smaller accounts. They may also use passive strategies as a complement to their active strategies.

Client Needs
The No. 1 reason a financial advisor may choose an active strategy over passive comes down to client needs, say financial advisors who spoke to ETF Report. For high net worth individuals, active strategies suit their needs, says Mark Painter, president of EverGuide Financial Group.

“A high net worth investor may have different goals for different pieces of money,” he said. “It’s not simply somebody that’s saving toward retirement or saving toward buying a house or any particular goal.”

There may be business needs and individual needs, or trust accounts for children and grandchildren: “Having that customization makes sense, because there are a lot more tax issues that come into play.”

Brian Pirri, principal at New England Investment & Retirement Group, says when diversifying investments for high net worth individuals, some passive choices may not be suitable or aren’t available. He says his firm not only uses the traditional mix of stocks and bonds for these individuals, but real estate and alternative investments, looking for vehicles that aren’t correlated to the overall market.

“So obviously we’ll go active on that stuff,” he said.

Painter says he’ll also use active strategies for retirees who often need very customized situations regarding income needs. He prefers to use a mix of stocks, bonds and real estate to create a reliable and sustainable income stream while participating in potential upside to protect against inflation. Painter says this would be “very difficult” to reproduce using passive strategies.

“You can do this with a mix of dividend ETFs and other income-producing ETFs, but from a perspective of really knowing your risks and having visuals on individual holdings, it makes a big difference,” he said.

While ETFs have daily transparency as part of their structure, some financial advisors who use active strategies prefer to be able to explain to clients exactly why they hold specific securities.

Peter Johnson, CEO of Ashfield Capital Partners, who favors picking growth-oriented stocks over a market cycle to outperform benchmarks as part of the firm’s core strategy, says his high net worth clients also like knowing what they’re holding and the specific reason for each security.

He says their active strategy lets them control the risk/reward characteristics of a portfolio much more easily and to customize it around the particular client’s goals and objectives. That’s especially true for clients with socially responsible investing wants.

“Clients like to know they don’t own a tobacco stock, or that they own environmentally [friendly] stocks if they have an emphasis in their portfolio around causes and beliefs they have,” Johnson said.

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