RIAs Favor Active, Passive Strategies Over Hybrids

Registered investment advisors (RIA) have shown a predilection for active and passive investment strategies at the expense of hybrid strategies over the past 12 months, according to a new survey of 1,023 RIAs.

Active management strategies were reported by 43 percent of RIAs in 2014, compared with 39 percent of RIAs in 2013, the survey found.

On the passive management side, 19 percent of RIAs said they engaged in passive strategies, an increase from 14 percent in 2013, the survey also found.

Hybrids, which 46 percent of RIAs said they were using in 2013, fell to 37 percent last year, according to the survey conducted by the company RIA in a Box.

G.J. King, president of RIA in a Box, which helps advisors create and launch registered investment advisories, said that in strong, stable markets, which has been the case in the past two or three years, more advisors use passive strategies.

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“You see more passive strategies during better market times,” he said in an interview with InsuranceNewsNet.

But in recessionary periods, or during volatile markets, which occurred last month, advisors tend to gravitate toward active management strategies as RIAs look to protect yields delivered by investment portfolios.

Over the past year, active and passive strategies have been either more — or less — popular with RIAs depending on the volume of an advisory firm’s assets under management (AUM).

The percentage of RIAs with $50 to $100 million in AUM who preferred active management strategies saw a big jump last year over the previous year, for example.

By contrast, the percentage of RIAs with between $25 million and $50 million in AUM using active strategies dipped last year compared with 2013.

The percentage of RIAs using a hybrid management strategy dropped last year from the previous year across all four AUM categories, the survey found.

Hybrid management strategies represent a compromise between an active and passive approach.

The core of the portfolio — say as much as 20 percent — might be anchored in a passive strategy, with the remainder managed through an active approach.

Over time, passive management models have gradually gained ground with investors attracted to low cost models provided by indexing.

Vanguard Group, a leading mutual fund giant known for passive investing, remains the most trusted mutual fund brand among RIAs, according to findings by Cogent Reports, a consulting firm, earlier this year.

Advisors also realize that beating market benchmarks isn’t the primary value RIAs provide for clients, King said, even if market-beating returns are always welcome no matter what portfolio management strategy prevails.

“A lot of advisors tried to add value with active strategies, but you’re seeing an evolution among advisors in that beating the market is not the value they give to clients,” he said.

RIAs are better off — and their clients as well — when advisors provide an overall, holistic approach to financial planning as well as portfolio management. RIAs that protect assets with insurance products or estate planning tools, for example, offer more value than RIAs that generate higher returns while taking a lot of risk and leaving assets overexposed.

Pricing models anchored in flat fees and retainers also tend to reward passive strategies since the value RIAs provide tend to be on the financial planning side of the advisory equation, not the portfolio side, King said.

In general, investment costs are coming down as a whole but cost transparency is also rising. “There’s no reason why advisors can’t succeed in a lower-fee industry,” King said.

For all the talk about the growth in passive investing, King said he was expecting to see even more RIAs relying on passive strategies than was revealed by the survey. “It’s interesting that active (strategies) are growing in the RIA channel,” he said.

King also said he was surprised by the decline in hybrid strategies, even if hybrid strategies were the preferred portfolio management style of newly formed RIAs last year. Of new RIAs, 41.4 percent said they used a hybrid style compared with 36.7 percent of new RIAs that used an active approach and 21.9 percent that used a passive approach.

RIAs that follow an active strategy, which clearly remain a bedrock of portfolio management, have more options among liquid investments than in the past, said consultant Howard Schneider, author of a report on trends in portfolio construction published earlier this year.

Liquid alternatives and exchange trade funds, which are traded every day, mean advisors have access to products that can be easily bought and sold on exchanges. That makes it easy to move in and out of positions in response to broader market movements.

In his April online survey based on more than 600 advisors, Schneider found that more than half of advisors had not shifted their relative mix of actively and passively managed investments in the past year.