Active Management

How much value does active advice really add? Active advice comes in two forms – the advice provided by an investment advisor or financial planner and the active management of a portfolio manager (vs an index or ETF fund). We have seen substantial growth in the ETF or “Exchange Traded Fund” markets over the past few years and many people are going it alone and making this move without understanding what it really means.

The Investment Funds Institute of Canada commissioned Ipsos Reid to conduct a survey in November 2011 that evaluated the impact financial advisors were having on Canadians’ financial health. The study showed that across all income brackets, people who worked with advisors had between 1.5-6.5 times more wealth than those who didn’t. While many people often say “I don’t make enough to start investing”, this study has clearly put that myth to rest. Looking at those households who have less than $35,000 per year of income – the average investable assets were $17,800 for homes that did not work with an advisor and $139,641 for those that did. For households earning between $35,000-70,000 per year, the difference was $48,467 vs $191,930. For households in higher income brackets, the spread was even bigger.

Researchers at the Yale School of Management conducted extensive studies in 2009 & 2011 to evaluate the true value of active management by portfolio managers. Their findings showed that investments with active management “significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence”.

The real challenge with active fund management is finding the managers who add real value instead of operate as “closet index” managers. A closet index manager will promote themselves as an active manager but the reality is their funds are little different from the indexes. The differences from an index can be best measured by a fund’s “active share” or the share of a portfolio’s holdings that differ from the benchmark index holdings. The 2011 study showed that on average, funds with an active share greater than 90% outperformed their benchmark by 3.64%. An active share between 60-90% outperformed by 1.63% and those with an active share under 60% were much more closely aligned with the returns of the index itself.

The same 2011 study found that 4 out of 10 funds in Canada (and 3 out of 10 in the US) were defined by the authors as “closet indexers”.

It’s been proven that Canadians who work with an advisor start saving earlier, save more and stay invested to meet their retirement goals. Stop finding excuses to further delay your investment planning and get started today. Ask questions, be picky and find an advisor that’s right for you.