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Compliance Concerns Shouldn’t Steer FAs from Active Strategies

August 2, 2018

Financial advisors need to overcome their fears of running into compliance issues when using active investment management, because passive investing alone isn’t enough to protect clients during downturns, Greg Luken writes on WealthManagement.com.

The growing popularity of passive investing means many client portfolios are composed entirely of passive investments. And these portfolios are similar across many advice practices, according to Luken, CEO of Nashville, Tenn.-based Luken Investment Analytics. In a downturn, that could expose clients to harm, he writes. And when clients' portfolios suffer a double-digit drop, they won’t take into account their advisors’ compliance concerns, according to Luken.

To re-introduce active investing in today’s portfolios, Luken suggests thinking of it as advisors once used to think about alternative investments. The goal of these investments was diversification and inverse correlation to various areas of the market at large, he writes.

Active investments achieve much the same goal: they minimize clients’ exposure, according to Luken. That’s not to say that advisors should forget about passive investments, he writes. Rather, they should find a mix of passive and active strategies that makes sense for their clients, according to Luken.

By Alex Padalka
  • To read the Wealth Management article cited in this story, click here.