Passive VS. Active Account Management:

Ever since the inception of the first “index fund” – a fund that tracks a particular index, such as the SPY ETF that seeks returns equal to the returns from the S&P 500 index – the debate over “active” versus “passive” asset management continues to rage on. 

“Active management” refers to any portfolio management strategy in which the manager “makes specific investments with the goal of outperforming an investment benchmark index.”

Picking individual stocks, for example, represents “active management.”

“Passive management,” on the other hand, refers to investment strategies that seek to match a particular stock or bond index – the idea being that by investing directly in index funds, trading costs are minimized, and there is essentially no risk of “underperforming” relative to the corresponding.

Many financial advisors take a stance on this issue, and there are compelling arguments on both sides.

On the passive management side, proponents point out that, “Over the last ten years, 82% of all money managers in the large-cap universe under-perform the market averages.”

Several advisors that support passive management believe that picking individual stocks, or investing in actively-managed mutual funds, is futile; they cite the relatively high management costs that come with actively managed investments, as well as the fact that approximately half of all mutual funds do not outperform their respective benchmark every year.

On the “actively managed” side, advisors will point out that, “the returns of funds with well-known managers that have outperformed the market significantly, and may argue that there are inefficiencies in the market that make certain stocks more appealing than others.”

They may also point to the recent recession, during which “passively managed” funds typically plummeted.

So how does one choose between “active” and “passive” financial advisors?

1) First of all, costs and fees are very important; even if a certain fund outperforms the market consistently, it most likely charges high fees that aren’t reflected in its return figures.

2) Secondly, the line between the two camps doesn’t have to be absolute; financial advisors may invest directly in indexes (passive investing), as well as picking individual stocks and funds as well.

Asking a potential advisor about his or her view on this topic is always a useful indicator of their investment philosophy and strategy.

We hope this helped.  Thanks for visiting AllFinancialAdvisors.com