4 Active Management Truths to Tell Clients During Financial Literacy Month

Financial Literacy Month, observed in April, gives advisors the opportunity to reconnect with clients and ensure they’re well-positioned to meet their goals. The volatility that markets showed earlier this year is undoubtedly still raw in clients’ minds, and advisors should make sure their clients’ portfolios have adequate risk protection measures in place — which, in many cases, means implementing active strategies.

Already, 2018 is shaping up to be one of the more economically turbulent years in recent memory, and our always-on news cycle can make it nearly impossible for advisors to convince clients to stick with a coherent strategy. One day, the news feeds indicate the economy is strong; the next, the data shows growth is stalling. It seems when the Dow falls, interest in active management is piqued, but when it rises again, investors soon forget.

It’s up to advisors to make sure their clients’ portfolios are protected from bear market losses now — before it’s too late. Here are four truths advisors can tell clients during Financial Literacy Month to encourage them to embrace active strategies:

1. Investors can benefit from active strategies now — not just during a bear market correction.

It’s entirely possible that the market will continue to reach new highs in 2018, and that we won’t see a bear market correction until late 2018 or early 2019. But even though we’re in the midst of the second-longest bull market run in history — which just reached the nine-year milestone — the next bear market isn’t a matter of if, it’s a matter of when. Advisors should explain to clients who aren’t worried about an inevitable correction that market cycle research shows that bear market losses since 1950 were up to seven times more powerful than bull market gains.

What many investors don’t realize is that not only do active strategies provide risk mitigation during bear market cycles that passive products may not — active can also outperform passive in a bull market. According to the Morningstar Active/Passive Barometer, a semiannual report that measures the performance of U.S. active funds against their passive peers, 43% of active managers outperformed their passive counterparts in 2017. And despite above-average returns from the S&P 500, many active ETFs outperformed the index last year.

2. If the Fed raises rates too aggressively, they could plunge the U.S. into a recession.

In his first news conference as Federal Reserve chairman, Jerome Powell seemed to indicate that he plans to follow a similar playbook as his predecessor, Janet Yellen. Not only did the Fed raise rates last month, officials expect two or three more rate hikes this year and three in 2019, which would create a deliberately restrictive interest-rate policy.

Historically, when the Fed shifts policy from easing to tightening, it leads to a bear market correction and (yes, it’s possible) a recession. Increased corporate and consumer borrowing costs, which tend to slow down consumption and business spending, could be offset by the fiscal stimulus created by the new tax law — but it’s too soon to tell whether tax reform will cause the consumer spending, business investment and GDP growth that would justify rate hikes. Even the most seasoned investors can’t predict how this tug of war between fundamentals and Fed policy will play out, so they would be wise to protect their portfolios from potential risks created by the Fed.