Should advisers choose active or passive funds for clients?

According to independent financial research company Defaqto, the choice between active and passive funds is just one of a myriad of investment decisions that advisers need to consider.  In addition, within this, there are a number of potential approaches that advisers can take - active only, passive only or both in unison.

Defaqto's Guide to Active and Passive Funds, published today, suggests that the cost pressures posed by the RDR may lead to the continued increase of new money being invested in passive funds - however, combining both active and passive funds in an investment solution could reduce costs and relative volatility, while still offering advisers and clients enough latitude to invest in active and specialist funds.

The guide highlights the key areas of due diligence that advisers should consider in order to identify active or passive funds that meet the needs of their clients, including:

- Assessing the fund manager's investment philosophy

- Assessing the fund manager's team and decision making process

- Objectively analysing costs and performance

- Identifying the index that passive funds are tracking and replicating

- Assessing how passive funds are replicating the index performance

Adrian Gaspar, Senior Consultant at Defaqto, said:

"Passive investing has certainly been a theme that has gained momentum in the UK, and the debate about the advantages of passive investing has been raging for many years in the US. Certainly, passive investing in retail funds in the UK has not gained as much traction as in the US. However, the RDR is likely to result in a level playing field in this regard.

"Both passive and active funds have their own distinct advantages. To the end investor, passive funds can result in low cost and relatively predictable performance. Active funds however do have the potential to outperform their indexes, if handled by talented managers. Advisers should bear in mind though that they must undertake thorough due diligence in order to establish preferred funds."