Active vs passive wealth management — the pros and cons

When looking to meet your investment needs, it’s important to choose a wealth management service that’s right for you, which offers you expert financial planning and investment management to help achieve your financial goals.

One question you may have, is – should I choose an active or passive wealth manager?

In this article, we’ll help you understand the difference between these two forms of wealth management, as well as their pros and cons.

What is active wealth management?

Active wealth management involves an experienced team having an active approach to investing on your behalf, changing positions regularly and taking advantage of short-term price fluctuations.

Active investments have the objective of generating better returns compared to a market benchmark index – such as the Standard and Poor’s 500 (S&P 500) index.

This strategy also aims to produce a lower risk level than the benchmark index, with a range of investments that are significantly different to the benchmark index.

What is passive wealth management?

Passive wealth management involves wealth managers investing in passive funds to grow and fortify your wealth.

The investment made are in line with a chosen benchmark index, often using passive index funds or exchange-traded funds (ETFs), which follow the performance of market indexes.

In general, very few adjustments are made to the portfolio, and the amount of buying and selling is limited. This is usually a cost-effective and efficient way of investing.

What are the pros and cons of each form of investing?

There are many pros and cons to both active and passive investing. Some of which are as follows:

Passive investing

Pros

• More manageable risk – Passive investing can prove to have a more manageable risk level, since the investment is not dependent on any rapid price fluctuations, but steady trends.
• Transparency – You also have more transparency on the assets involved, as it is clear which are include in an index fund. This also applies to fees, where there tends to be lower costs, and there won’t be as many significant charges for investors.
• Less adjustments – Considering this is a long-term investment, it doesn’t involve continuous changes to your position, and therefore can be a more time-efficient and cost-effective way to invest.

Cons

• Smaller returns – Passive investing tracks and replicates the index, therefore it’s near impossible to beat the market and usually results in small returns compared to active investing.
• Always follows the benchmark – The nature of tracking the benchmark index through a passive fund means you are limited to a predetermined set of investments and positions held, regardless of the direction of the market.

Active investing

Pros

• Chance for higher returns – Active investing gives you the opportunity to beat the market, resulting in higher returns compared to the benchmark indexes.
• More flexibility with investments – With this investment type, you’re not bound by the performance of a specific benchmark index. You can hold various investments, differing from the benchmark, rather than just following it.

Cons

• More fees involved – Due to active investing involving more research and market monitoring, the fees and charges you’d need to pay a wealth management service for this form of investing, will likely be much higher.
• Less chance of success – It’s been proven by many studies that active investing and beating the market, whilst it can give you greater returns in some cases, is almost impossible to achieve on a consistent level.

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Now that you know the differences between active and passive wealth management, as well as their pros and cons, are you ready to find the right wealth management service for you and your financial needs?

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Please note, the value of your investments can go down as well as up.