News and Commentary

UPDATED Active or Passive? Is there a correct answer? by Shane Phillips, CFA, CAIA, CFP

Ever since the creation of the first investable index fund in 1975, investors have debated whether it is better to invest in actively managed or passively managed investments. Is one good and the other bad? No. Is one better than the other? Not necessarily. Should you focus on purely utilizing one over the other? Probably not.

Passively managed investments are those in which investors’ money is automatically put into securities that match or track to a specific index, based on the percentage of the securities weighted market capitalization within the index. Investors can expect the performance of passive investments to mirror the selected index.

Conversely, actively managed investments involve the participation of a portfolio manager or a team of managers who select the appropriate securities in which to invest. As a result, it is far more difficult to set return expectation for active investments.

For example, a passive investment in an index fund that mirrors the S&P 500 index can be allocated to all 500 companies in the index according to their weighting. Investors can expect to yield returns that are similar to the index, minus a management fee. Alternatively, with an active investment in large-cap U.S. stocks similar to the S&P 500 index, a portfolio manager would hand-select the specific S&P 500 companies in which to invest and he or she would be able to invest in companies that are not in the S&P 500 index as well.

Investors can expect passive strategies to have lower fees and strive to be more tax efficient than active strategies because the former do not involve the management of professional advisors nor do they typically involve frequent trading activity. However, these elements alone should not be the deciding factor in choosing an investment style. Consideration of asset class, performance and an investor’s time horizon should also weigh heavily in the active/passive debate.

Asset Class

From an asset-class perspective, Provenance Wealth Advisors views the active/passive debate very differently. We are typically more open to passive management in our equity allocation than we are in our fixed-income allocation. Passive equity investment weightings are often based upon a company’s market capitalization, or its share price multiplied by the number of shares available, in order to create an investable fund. As an example, Apple represents the largest holding in the well-known S&P 500 index because its market capitalization is the largest of the companies in the index.

On the other hand, most options for passive, fixed-income investments are based on the amount of debt a company issues. The more debt a company has, the larger its position will be in the fixed-income index. This philosophy of investing more assets in a company solely because it issued more debt goes against common sense and is a main reason we prefer active management in the fixed-income space. Additionally, the fees for actively managed fixed-income investments are usually substantially lower than those for active equity investments, making the fee gap less substantial.

Inside the equity allocation, we view areas of the market that are less efficient as being more attractive for active management. Less efficient markets can be geographic, such as emerging and international markets being less efficient than U.S. markets, or by size, with small cap stocks being less efficient than large cap. Less efficient markets typically garner less attention from investors and have larger differences between them, thereby creating potentially more opportunities to outperform expectations. For example, emerging markets banks in Brazil and China will look very different than banks in the U.S., where they will likely be more similar.


In recent years, countless headlines and advertisements have promoted the false concept that actively managed funds cannot outperform index funds due to manager fees.

Before considering this claim, investors should first ask themselves “What does performance mean to me?” Some investors focus solely on the rate of return an investment provides. Others however, focus on an investment’s ability to help them achieve their goals, which is usually accomplished by focusing on the risk/return trade-off the investment offers. Risk, or market volatility, matters because if an investment takes an investor on a roller coaster ride of ups and downs, the investor’s resulting euphoria or stress could influence his or her decision to stick to a pre-determined investment plan. An investment plan typically works best when investors adhere to it and refrain from jumping in and out of the market, which can play a big part in the investment’s performance.

Secondly, it is unreasonable to assume that all actively managed funds are alike. Rather, many financial advisors select investment funds based on a labor-intensive due diligence process. For example, the advisors with PWA weigh many different variables in the selection process, including manager experience, investment philosophy and historical track record among many others. Our ultimate goal is to target what our research dictates are the top managers in a specific investment area.

Time Horizon

It is often said that investors should be in actively managed funds for a full market cycle, or a minimum of three to five years, in order to help achieve the true results of the fund manager’s investment style. The fact is that a manager could have a mix of very good and very bad years. Therefore, investors with time horizons as short as one to two years may be better served to invest in passively managed investments to obtain general asset class performance. By doing so, they may potentially avoid the risk of being invested in an active manager’s down years and having to sell before their investments recover.


The active/passive debate is expected to continue for the foreseeable future. At Provenance Wealth Advisors, we believe it is best to consider all of the elements outlined above before making the decision to invest in either active or passive investments. We rely on both strategies and believe that a strong portfolio should involve the evaluation of the entire universe of investment choices designed to meet clients’ goals rather than limiting ourselves to a subset of the options available to us.

About the Author: Shane Phillips, CFA, CAIA, is CFP®* professional and member of the investment team with Provenance Wealth Advisors, an Independent Registered Investment

Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. For more information, call (305) 379-8888 or email

Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (305) 379-8888.

Shane Phillips is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful.

Diversification and asset allocation do not ensure a profit or protect against a loss. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall, and when interest rates fall, bond prices generally rise. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

Investors should consider their investment objectives, risks, charges and expenses of an investment company carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.

 * Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.