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Is Your Adviser More Aggressive Than You Realize?


Are you and your financial adviser on the same page when it comes to building and growing your nest egg? If you look closely, he or she might be more aggressive than you realize.

A study published last month by the Financial Planning Association, titled “Trends in Investing,” found that 67% of surveyed advisers believe that “active management,” as opposed to “passive management,” provides “the best overall investment performance.”

The former approach seeks, for instance, to identify individual stocks that will outperform the market; the latter approach typically invests in the market as a whole with index funds.

The FPA’s research also found that, among those advisers who place their clients’ savings in mutual funds, an average of 70% of assets allocated to such investments are deposited in actively managed funds. What’s more, 25% of surveyed advisers say they “intend to use more actively managed funds” in the next 12 months, while 16% plan to use more passive funds.

Of course, the debate over the merits of active investing vs. passive investing has been playing out for decades. A substantial amount of research has found that actively managed mutual funds – year in and year out – have a tough time beating index funds. A big reason: costs. Expenses associated with trading, research and staff typically take a bite out of returns from actively managed investments.

Each year, for instance, Standard & Poor’s publishes its “Indices Versus Active Funds Scorecard,” a comparison of the performance of actively managed equity and fixed-income mutual funds with market benchmarks (such as the S&P 500 index). For 2010, the study found that “domestic funds lagged behind the benchmarks in nearly all categories,” including large-cap, mid-cap and small-cap funds.

That said, the 2010 study also found that actively managed international funds (with the exception of emerging-market funds) tended to perform better than benchmarks.

The point here: Talk with your financial adviser and make sure you understand the approach that he or she is taking with your investments and whether you agree with that strategy. (Put another way: Is your adviser’s approach one that allows you to sleep comfortably at night?) You might like the idea of having at least a portion of your assets in actively managed vehicles – if you think your financial adviser is capable of picking investments that can beat the markets’ average returns.

Finally, the FPA survey contains an interesting – and encouraging – counterpoint to the active vs. passive question. When advisers were asked to identify the five most important criteria they use to evaluate specific funds for clients’ portfolios, the most important measurement – in 64.5% of responses – was expense ratios. So, even if your adviser likes actively managed investments, he or she is likely aware of the importance of keeping costs low.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.