Markets in a Minute
What is the Success Rate of Actively Managed Funds?
What is the Success Rate of Actively Managed Funds?
Over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark.
The above graphic shows the performance of actively managed funds across a range of fund types, using data from S&P Global via Charlie Bilello.
Missing the Mark: Actively Managed Funds
Several factors present headwinds to actively managed funds.
- Trading costs: First, fund managers will trade more often than passive funds. These in turn incur costs, impacting returns.
- Cash holdings: Additionally, many of these funds hold a cash allocation of about 5% or more to capture market opportunities. Unlike active funds, their passive counterparts are often fully invested. Cash holdings can have the opposite effect than intended—dragging on overall returns.
- Fees: Active funds can charge up to 1-2% in investment manager fees while funds that tracked an index passively charged just 0.12% on average in 2022. These additional costs add up over time.
Below, we show how active funds increasingly underperform against their benchmark over each time period.
| Fund Type | 1 Year % Underperformed | 5 Year % Underperformed | 10 Year % Underperformed | 20 Year % Underperformed |
|---|---|---|---|---|
| All Large-Cap | 51 | 87 | 91 | 95 |
| All Small-Cap | 57 | 71 | 89 | 94 |
| Large-Cap Growth | 74 | 86 | 96 | 98 |
| Large-Cap Value | 59 | 69 | 85 | 87 |
| Small-Cap Growth | 80 | 59 | 85 | 97 |
| Small-Cap Value | 41 | 81 | 91 | 92 |
| Real Estate | 88 | 62 | 74 | 87 |
As we can see, 51% of all large-cap active mutual funds underperformed in a one-year period. That compares to 41% of small-cap value funds, which had the best chance of outperforming the benchmark annually. Also, an eye-opening 88% of real estate funds underperformed.
For context, Warren Buffett’s firm Berkshire Hathaway has beat the S&P 500 two-thirds of the time. Even the world’s top stock pickers have a hard time beating the market’s returns.
2020 Market Crash: A Case Study
How about active funds’ performance during a crisis?
While the case for actively managed funds is often stronger during a market downturn, a 2020 study shows how they continued to underperform the index.
Overall, 74% of over 3,600 active funds with $4.9 trillion in assets did worse than the S&P 500 during the 2020 market plunge.
| Stage of 2020 Cycle | Time Period | % Underperforming S&P 500 |
|---|---|---|
| Crisis | Feb 20 - Apr 30, 2020 | 74.2 |
| Crash | Feb 20 - Mar 23, 2020 | 63.5 |
| Recovery | Mar 24 - Apr 30, 2020 | 55.8 |
| Pre-Crisis | Oct 1 2019 - Jan 31, 2020 | 67.1 |
Source: NBER
In better news, roughly half underperformed through the recovery, the best out of any market condition that was studied.
The Bigger Impact
Of course, some actively managed funds outperform.
Still, choosing the top funds year after year can be challenging. Also note that active fund managers typically only run a portfolio for four and a half years on average before someone new takes over, making it difficult to stick with a star manager for very long.
As lower returns accumulate over time, the impact of investing in active mutual funds can be striking. If an investor had a $100,000 portfolio and paid 2% in costs every year for 25 years, they would lose about $170,000 to fees if it earned 6% annually.
Markets in a Minute
The Top 5 Reasons Clients Fire a Financial Advisor
Firing an advisor is often driven by more than cost and performance factors. Here are the top reasons clients ‘break up’ with their advisors.
The Top 5 Reasons Clients Fire a Financial Advisor
What drives investors to fire a financial advisor?
From saving for a down payment to planning for retirement, clients turn to advisors to guide them through life’s complex financial decisions. However, many of the key reasons for firing a financial advisor stem from emotional factors, and go beyond purely financial motivations.
We partnered with Morningstar to show the top reasons clients fire an advisor to provide insight on what’s driving investor behavior.
What Drives Firing Decisions?
Here are the top reasons clients terminated their advisor, based on a survey of 184 respondents:
| Reason for Firing | % of Respondents Citing This Reason | Type of Motivation |
|---|---|---|
| Quality of financial advice and services | 32% | Emotion-based reason |
| Quality of relationship | 21% | Emotion-based reason |
| Cost of services | 17% | Financial-based reason |
| Return performance | 11% | Financial-based reason |
| Comfort handling financial issues on their own | 10% | Emotion-based reason |
Numbers may not total 100 due to rounding. Respondents could select more than one answer.
Numbers may not total 100 due to rounding. Respondents could select more than one answer.
While firing an advisor is rare, many of the primary drivers behind firing decisions are also emotionally driven.
Often, advisors were fired due to the quality of the relationship. In many cases, this was due to an advisor not dedicating enough time to fully grasp their personal financial goals. Additionally, wealthier, and more financially literate clients are more likely to fire their advisors—highlighting the importance of understanding the client.
Key Takeaways
Given these driving factors, here are five ways that advisors can build a lasting relationship through recognizing their clients’ emotional needs:
- Understand your clients’ deeper goals
- Reach out proactively
- Act as a financial coach
- Keep clients updated
- Conduct goal-setting exercises on a regular basis
By communicating their value and setting expectations early, advisors can help prevent setbacks in their practice by adeptly recognizing the emotional motivators of their clients.
Markets in a Minute
The Top 5 Reasons Clients Hire a Financial Advisor
Here are the most common drivers for hiring a financial advisor, revealing that investor motivations go beyond just financial factors.
The Top 5 Reasons Clients Hire a Financial Advisor
What drives investors to hire a financial advisor?
From saving for a down payment to planning for retirement, clients turn to advisors to guide them through life’s complex financial decisions. However, many of the key reasons for hiring a financial advisor stem from emotional factors, and go beyond purely financial motivations.
We partnered with Morningstar to show the top reasons clients hire a financial advisor to provide insight on what’s driving investor behavior.
What Drives Hiring Decisions?
Here are the most common reasons for hiring an advisor, based on a survey of 312 respondents.
| Reason for Hiring | % of Respondents Citing This Reason | Type of Motivation |
|---|---|---|
| Specific goals or needs | 32% | Financial-based reason |
| Discomfort handling finances | 32% | Emotion-based reason |
| Behavioral coaching | 17% | Emotion-based reason |
| Recommended by family or friends | 12% | Emotion-based reason |
| Quality of relationship | 10% | Emotion-based reason |
Numbers may not total 100 due to rounding. Respondents could select more than one answer.
While financial factors played an important role in hiring decisions, emotional reasons made up the largest share of total responses.
This illustrates that clients place a high degree of importance on reaching specific goals or needs, and how an advisor communicates with them. Furthermore, clients seek out advisors for behavioral coaching to help them make informed decisions while staying the course.
Key Takeaways
With this in mind, here are five ways advisors can provide value to their clients and grow their practice:
- Address clients’ emotional needs early on
- Demonstrate how you can offer support
- Use ordinary language
- Provide education to help clients stay on track
- Acknowledge that these are issues we all face
By addressing emotional factors, advisors can more effectively help clients’ navigate intricate financial decisions and avoid common behavioral mistakes.
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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