The argument over whether active or passive management is the better approach for clients is unlikely to be put to rest any time soon, despite a slight nudge towards passive over the last few years.
According to the latest Adviser Ratings Australian Financial Advice Landscape report, there has been “a modest shift toward passive strategies in recent years”, however, it added that the majority of client portfolios still maintain “significant actively managed components”.
Over the last 12 months, the report found the proportion of actively managed assets within portfolios fell from 62 per cent to 59 per cent, with a higher proportion of advisers decreasing their usage of actively managed investments than those who increased it (40 per cent versus 35 per cent).
However, what is clear is that it is not a one-or-the-other decision for financial advisers.
“Portfolio construction approaches reflect the increasing trend toward specialisation, with advisers demonstrating deliberate decisions between active and passive management strategies,” Adviser Ratings said.
It added: “This balanced split between active and passive managers suggests that practices employ strategic diversification across active and passive strategies.”
The report added that the balance also allows practices to address the dominant retirement planning concerns (74 per cent of client inquiries) with cost-effective core portfolios while using active strategies for areas where specialised expertise adds value.
“This strategic alignment between investment approaches and client priorities demonstrates how practices are evolving their service delivery to meet changing consumer demands,” Adviser Ratings said.
Around one-fifth of financial advisers do see the choice as binary – 10.7 per cent of advisers follow a passive-only client portfolio construction, while 10.1 per cent only utilise active management – however, the bulk are providing a mix of the two for their clients.
The weighting does still favour active, with 61.2 per cent falling somewhere between a 50–50 split and a 95 per cent weighting.
However, the trend towards passive continues to look less clear, with passive fund users showing a “marked decrease in willingness to increase their usage”.
The report found that 19 per cent of advisers are looking to increase recommendations over the next 12 months – down from 24 per cent in the prior year.
According to Adviser Ratings, this continued variation in the allocation of strategies between active and passive has implications for “both practice economics and the broader investment ecosystem”.
Chief among these is the justification of their fee framework, with advisers that adopt passive strategies for specific portfolio components increasingly needing to “justify the value of their advice through other aspects of their service offering”.
“This is driving greater emphasis on financial planning expertise, behavioural coaching and tax optimisation rather than investment selection or market timing – a shift fundamentally changing how practices articulate and demonstrate their value proposition,” the report said.
It also flows through to their platform selection criteria, with the need to manage hybrid portfolios placing specific technical requirements on platforms. Adviser Ratings noted that this has led to advisers looking to platforms that are able to “efficiently implement both approaches”.
“This helps explain the continued dominance of full-service platforms despite the emergence of lower-cost alternatives, as the operational efficiency gains outweigh pure cost considerations,” it added.
There are also flow-on effects for the relationships between financial advisers and product providers, the report said, as well as the need for a change in the approach to client education.
“Asset managers are responding by developing more adviser-friendly implementation tools rather than simply promoting product performance, while platform providers are enhancing their model portfolio capabilities to accommodate hybrid approaches,” Adviser Ratings said.
“The increasing complexity of hybrid investment approaches necessitates more sophisticated client education resources. Practices are investing in communication tools that explain the relative merits of active and passive approaches in different market contexts, helping clients understand the strategic rationale behind portfolio construction decisions.”
Combined, it added, the result is a “more nuanced competitive landscape” that places more value on adviser expertise in “appropriate strategy selection and implementation efficiency” than traditional product selection capabilities.
