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Active funds are not a one-man show. Management firms combine supercomputing capabilities with a multitude of field experts who have earned credentials like PhDs, MBAs, and CFA charterholders. Theoretically, then, these investment powerhouses have every advantage to produce funds that outperform benchmarks like the S&P 500®, yet they fail on a consistent basis[i]. I believe there are five major reasons why large-cap managers in particular fall short of the S&P 500®.
It comes as no surprise that investors expect financial advisors to be able to select profitable and suitable investments for client portfolios. There are three primary ways in which advisors approach this decision-making process. Some advisors rely on their home office or investment companies to perform the research and create a list of recommended investments. Others prefer to leave the investment decisions and asset management solely in the hands of a third party. Lastly, an advisor may prefer to perform their own research and analysis to determine suitable investments for their clients.
As an advisor who enjoys the research and analysis approach, I have begun to wonder if the time spent on choosing between active and passive management, especially with large-cap blend funds, is worth the trouble. Many different studies are available to argue the success of one over the other, and each strategy certainly has its pros and cons. I do not intend to elaborate on these differences; instead, I am presenting data I have gathered over the years for advisors and investors to bear in mind when deciding between active and passive investments. |
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This communication is strictly intended for individuals residing in the states of CA, FL, GA, IL, IN, MD, MN, OH, SC. No offers may be made or accepted from any resident outside the specific states referenced.
Securities and investment advisory services offered through Woodbury Financial Services, Inc. (WFS), member FINRA/SIPC. WFS is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of WFS.