Despite persistent underperformance of active funds compared to passive index tracking, many financial advisers are shifting their focus towards comprehensive planning services, citing the difficulty of beating indices after fees.
A difficult stretch for active stock pickers is pushing more financial advisers to sell themselves as planners first and portfolio managers second. Morningstar’s latest data show that, in the 12 months to 30 June, only 27% of active large-cap managers beat passive funds that track broad indexes such as the S&P 500 after fees. Over the 10 years to the end of June, active funds beat passive ones only 13% of the time on average, underscoring how persistent the gap has become.
That picture is broadly consistent with S&P Dow Jones Indices’ SPIVA scorecards. Its mid-year 2024 report found that 57% of active large-cap US equity managers trailed the S&P 500, while 71% of mid-cap managers lagged the S&P MidCap 400. At the smaller end of the market, however, active management fared better: only 15% of small-cap managers underperformed the S&P SmallCap 600, a reminder that results vary sharply by market segment.
The numbers help explain why many advisers are broadening the way they describe their value. Randy Bruns of RIA Model Wealth said he was “shocked” by how many advisers still favour active portfolio management, arguing that there is decades of evidence showing how hard it is to beat an index after fees. Bruns added that the stronger case for advice firms now lies in tax planning, retirement income, Social Security, Medicare and estate work, where he said good planning can make a measurable difference.
Some advisers still defend active management, especially where markets are less efficient. Monica Dwyer of Harvest Financial Advisors in West Chester, Ohio, said her firm manages some investments in-house but avoids paying outside managers for active strategies. She said the recent market rally has been driven by a relatively small group of technology names, making it risky for fiduciaries to concentrate too heavily in one sector. Michael McMeans of Silverling Financial in Columbus, Ohio, said active managers can also add value in small- and mid-cap stocks, where companies receive less scrutiny and Morningstar found closer to half of active managers beating passive rivals. He argued the case is even stronger in private markets, where companies often remain out of the public eye for longer and there is more work to do in deciding what to own.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
