Active or Passive – Which Investment Is Best For You?

The debate between having an investment manager look after your portfolio while paying a fee for the privilege, or going with the flow with a less hands-on approach at a lower cost, is coming to an end.

Instead of taking sides, more investors are opting for a mix of both strategies in their portfolio management.

The dilemma is always faced when working with wealth managers – you always want higher returns on your money, but the fees will cost more if someone actively trades on your behalf.

However, if their trading isn’t as profitable as you’d have liked or expected, you are paying someone for failure, as any profits are eroded by the fees or if no profits are made, you are piling up a bigger loss.

Opting for the safer, lower return policy may not always be suitable either.

Revealing the true cost of fund management

Managing a portfolio of investments has always been tricky, especially for investors who want to make their money work but either do not understand the intricacies of financial markets or do not have the time to spend growing their portfolio.

But times are changing.  New rules from the Financial Services Authority, the City regulator, could mean fund managers have to reveal the true cost of active management, and it is likely that you are going to be disappointed by what you see because the figure is likely to be more than you expected.

Consequently, financial experts are predicting a boom in the sales of low-cost, but safer investment products that give lower returns.

These products are usually tracker unit trusts or exchange traded funds (ETF), where the fees could be as low as 0.2%.  The beauty of a tracker is that it aims to mirror – or track – the performance of a chosen stock market index or commodity market.

One of the drawbacks of an ETF is that they are listed on the stock exchange much like shares.  This means there is no set price for buying and selling.  So buy on a good day and you get a great bargain, but sell on a bad one and that bargain loses that lustre.

Exchange Traded Funds (ETF)

However, the real attraction to the ETF is that they are cheaper than many fund management schemes and don’t have exit fees – though stockbroker commissions can vary.

For most people, passive investing seems a logical choice simply because it removes the risk of someone trying to chase profits while racking up high fees. Trying to outperform the market, especially in recent times, has been difficult.

Like all potential investments make sure you get proper advice but do mention ETFs and consider them as a part of your portfolio or wealth management plan.

Lastly, a word of word of warning – some fund managers will charge a high administrative fee for running active and passive investments together in a portfolio – the term is ‘blending’. If you are faced with this, consider whether you really need to pay extra for no additional services.