The futility of the active versus passive debate

FROM time to time, we get this question about the way we manage wealth for our clients: Why should clients pay you an ongoing advisory fee if you take a “passive” instead of an “active” approach to investing?

In the investment world, an active investment strategy is one where the investment managers switch from one asset class/country/region/theme to another, or pick securities based on short-term market forecasts to try to get higher-than-market returns (also known as alpha).

This is the opposite of passive investment managers who buy a basket of securities that simply tracks an index and do not make frequent changes due to short-term views of the markets. In doing so, they will only get market returns. Because of the term passive, it seems to suggest that it is an inferior, lazy approach with nothing much being done once an investment is made. Because passive managers do not give excess returns over the markets, there is no value added. Perhaps one should just DIY and avoid paying extra fees to wealth advisers.