written by: ROBBIE CANNON – President + CEO for Horizon Investments

The magician’s assistant has the ability to distract the audience from the real trick happening in plain view. In our field, the “Active vs. Passive” debate has been raging for years, at least as it pertains to a preferred method of investing. But, that might not be the only place the “Active vs. Passive” trick will exist in the (near) future. Here are at least three reasons why advisors should care about this debate — and maybe not for the reasons you think.

• It appears that the Passive marketing engine has won, giving the illusion that the Passive investing option is the clear winner of this decades-old debate. However, there are at least a few reasons why Active will always be a companion to Passive, and never an extinct species of investments. First, Active typically does well in both down markets and in markets that have dispersion (the opposite of simple “risk on/risk off” markets). Second, as investors move money to Passive strategies, they create opportunity for Active strategies to differentiate returns from the “crowd” (and possibly “crowded”) trade.
• The DOL rule has necessitated a fiduciary discussion that is occurring with advisors. Once an advisor switches to the “low cost” model, it will be increasingly difficult to adapt that model to a changing world. This is like an investment dead end, one that actually creates less flexibility with respect to future investments or strategies that advisors may want to use, but will be prohibited from using because they may not be the lowest cost.
• Here is what we believe to be the rabbit in the hat: the current Active vs. Passive investment discussion is a precursor to a larger debate about Active vs. Passive advice. Many advisors have embraced a “cheap Passive” option for investment management when clearly they would argue for a different option when it comes to advice. However, there is a large Passive firm that is now advertising “keep more with our low financial advisor fee of only .30%.” Keep more from whom? We currently have an advice market that IBM Watson, Google, Apple, and Amazon still have yet to enter, but it would be naïve to believe that at least some group of them will. It does not take creativity to believe that the Passive vs Active advice discussion is coming sooner rather than later.

While interesting as a debate, history shows that the Active vs. Passive is merely another cyclical investment conversation with no clear conclusion. However, this debate holds clear and important implications to the advisor’s business model in terms of portability, flexibility, and profitability. Depending on decisions made, the very future of the advisor’s business model may be affected by retreating to a “low cost” answer. While our financial services industry is in transition, make sure you are keenly aware not to be distracted by one debate, only to be hurt by the outcome of another.