Challenging Traditional Active Management

Morgan Stanley’s latest European asset management missive is equally forthright. In Morgan Stanley’s view, the growing polarization of the industry favors dirt-cheap indexers and specialist managers who offer steady returns.

These trends filter down to wealth management in a number of discrete ways. First off, advisors will need to become increasingly nimble in order to generate the types of returns their investors want. The old game of choosing an actively managed large-cap mutual fund and hoping for the best are likely over. Innovative products such as ETFs and hedge funds should be considered, especially for those interested in marketing to the wealthiest segments of the market.

Matching client needs with returns is also a crucial piece of the puzzle. As Peter Bernstein once said, “survival is the only road to riches.” In his view, one should try to maximize returns only if losses don’t threaten survival and there is a compelling need for extra gains. As wealth managers, it’s time we realize that our clients don’t fit into this risky category, and our actions as prudent asset allocators should reflect that realization. Ben Warwick is chief investment officer of Sovereign Wealth Management in Denver and the author of Searching for Alpha: The Quest for Exceptional Investment Performance (Wiley, 2000) and The WorldlyInvestor Guide to Beating the Market (Wiley, 2001). You can purchase these books at the IA Bookstore at http://www.invest-store.com/investmentadvisor/.