Welcome to Financial Advisor IQ

Why Clients Might Want More Active Management Now (And What Some Advisors Are Doing About it)

By Murray Coleman October 4, 2017

A new wealth management study by Credit Suisse suggests interest in passively managed funds might be waning among high net worth investors and their advisors.

In a just-completed industry survey of U.S. retail advisors, the Swiss-based bank finds in the last quarter 41% of new money was earmarked for funds that follow a benchmark. Those included ETFs and index mutual funds.

That number was flat quarter-over-quarter, notes Craig Siegenthaler, an analyst in New York who is overseeing a series of such wealth management studies for Credit Suisse. Also showing waning momentum among advisors are allocations to ETFs, he says. The average net new asset mix listed in the report was 48% active, 41% passive and 10% alternative.

“The indications are right now that demand in the U.S. retail advisory channel for passive management is hitting a plateau and moving closer to equilibrium with actively managed funds,” Siegenthaler says.

If such a pattern persists through the current quarter and into the next, he believes signs will more clearly show that “the rotation from active to passive will slow over the next 12 months” in terms of how advisors are using new money coming in from clients.

But others aren’t so sure comparing third-quarter allocation data to the previous three-month period makes for a trend. Part of any recent shift picked up by Credit Suisse is likely tied to a short-term drift in investment sentiment, says Jerry Slusiewicz, president of Pacific Financial Planners in Laguna Niguel, Calif.

The advisor, who manages about $90 million, is hearing a lot of “performance chasing” talk showing up in client conversations of late.

“The passive investment market did pretty well in the U.S. when everything was rising,” Slusiewicz says. “But since mid-year, domestic stocks haven’t been moving up or down very quickly. The broader indexes have been stuck in a fairly tight trading range where even new records seem more like micro-highs than groundbreaking leaps of faith.”

Such an apparent performance rut has increased client interest in active managers who can both search out better-positioned sectors as well as play defense in case earnings growth slows, he observes. At the same time, Slusiewicz finds that many advisors like himself who act as portfolio managers are starting to become more proactive.

Steven Kaye

“I’ve fallen into a sort of lull by staying too passive,” he says. “But that’s changing – I’m becoming more tactical with client assets by considering more active strategies.”

Steven Kaye, chief executive of AEPG Wealth Strategies in Warren, N.J., is conducting his own informal sentiment study. Along with other portfolio managers and advisors at the firm, they’ve been taking the pulse of fund wholesalers, clients and other wealth managers.

The consensus, according to Kaye, seems to be that industry reps remain wary of a market where volatility is hovering around historic lows. “They still aren’t convinced that investors are ready to focus on short-term risk management through dramatically greater use of actively managed fund managers,” he says.

Asset managers keep “flooding” the market with new ETFs designed to mix passive and active management strategies, warns Gary Quinzel, senior portfolio manager at AEPG Wealth Strategies.

The indie RIA, which manages about $900 million, uses both active and passive funds. “This over-saturation of funds using enhanced and alternative indexes is causing enough confusion in the marketplace to blur the lines between active and passive management,” Quinzel says.

That is likely to lead both advisors and their clients, he predicts, to look at claims by active fund managers of any long-term benefits with “a great deal more skepticism.”

Andy Kapyrin, chief investment officer at $3.5 billion RegentAtlantic in Morristown, N.J., agrees.

“At this point, the cat’s out of the bag,” he says. “Too many high net worth investors have learned how much money they can save and how little of a difference active management really makes over time to think that demand for passive investing is going to fall off a cliff. It’s here to stay.”