Despite increased flows to passively managed solutions, most financial advisors continue to rely on actively managed solutions, including mutual funds and separately managed accounts, according to a new research report by Practical Perspectives.
The report “Financial Advisors and Use of Actively Managed Solutions — 2017” also finds that many expect their use of active management won’t diminish and may even increase in the foreseeable future.
Most advisors using actively managed solutions have not changed their overall use of these solutions in the past 12 months, according to the report, and only 1 in 5 advisors have decreased use.
“Active management is fundamental to how most advisors work with their clients, and this is rooted in many factors including their desire to help manage portfolio volatility and reduce risk,” Howard Schneider, president of Practical Perspectives and author of the report, said in a statement.
The report determines that the factors that drive advisor use of actively managed solutions include the desire to reduce portfolio volatility, accessing strategies not typically available in passive vehicles, the potential for superior returns, and advisor comfort and experience in using active investments, especially mutual funds and SMAs.
According to Schneider, “providers of actively managed solutions should recognize that most advisors frame the issue as active together with passive, rather [than] active versus passive.”
The report finds that the use of actively managed solutions is widespread among advisors — with most using a mix of active and passive strategies — but only a limited segment (primarily RIAs) exclusively dependent on passive investments.
“Advisors perceive combining active and passive investments as the best solution for their clients and only a limited portion of advisors rely exclusively on either active or passive investments,” Schneider said in a statement.
The use of passive solutions is primarily a long-term strategic decision and advisors do not perceive the use of passive solutions to be a fad, according to the report.
“Passively managed solutions are clearly growing in prominence and active management faces fundamental challenges related to cost, performance, and transparency,” Schneider said. “However, there does not appear to be widespread abandonment of active management among established advisors.”
While high expense and cost are the foremost challenges related to actively managed solutions, the report finds that advisors using actively managed solutions are generally satisfied with overall performance although satisfaction varies widely by user segment.
In selecting specific actively managed investments, advisors are most influenced by track record or performance including return and risk and secondarily by the providers’ expertise in a specific asset class or style and by fees and expenses.
According to Schneider, “there are many steps active managers can take to help advisors including how to position active management alongside passive management in building portfolios.”
He adds that most advisors still prefer active management in more “opportunistic equity and fixed income categories.”
And, in fact, the report finds that advisors prefer actively managed equity solutions in more opportunistic categories such as emerging markets, specialized equity, international equity, and mid- or small cap.
In actively managed fixed income solutions, advisors prefer opportunistic categories such as high yield, strategic income, municipal bond and international bond.
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