Why Advisors Still Use Active Funds as Active Managers Lag

Morningstar data show 27% of active managers of large-cap stocks beat index-tracking funds in the 12 months to June 30. Over the decade to the end of June, active funds outperformed passive peers 13% of the time. Morningstar’s analysis measures returns after fees.

Passively managed ETFs and mutual funds held $21.88 trillion in U.S. assets at the end of June, while actively managed funds held $18.83 trillion, according to the Investment Company Institute.

Randy Bruns of RIA Model Wealth described himself as “shocked” that many advisors continue to favor active strategies. He blamed large banks and brokerage firms that create proprietary products and keep sales forces with incentives to sell them. He added that many financial planners now concentrate on services such as tax planning, retirement income strategy, Social Security and Medicare choices, and estate planning.

Monica Dwyer, vice president at Harvest Financial Advisors, noted her firm manages some investments actively in-house rather than paying outside managers. She pointed to recent index gains driven by a small group of technology-related companies, particularly semiconductor firms, and said her firm keeps a lower concentration in technology because of concern about a potential AI bubble. Dwyer added her firm’s portfolios have matched year-to-date S&P 500 returns.

Michael McMeans, president of Silverling Financial, said active managers can do better in small- and mid-cap ranges where companies receive less analyst coverage. Morningstar’s data show active managers focused on small caps (about $250 million to $2 billion) and mid caps ($2 billion to $10 billion) outperformed passive rivals nearly 50% of the time. McMeans also pointed to private investments, where firms stay private longer and are not required to disclose the same level of public data.

At least one academic paper questioned whether measured underperformance of active funds holds up after adjustments for fees and other factors. Data show steady flows into low-cost index funds and ETFs as investors seek lower-cost exposure to market benchmarks.

The debate over active versus passive has led many advisors to emphasize planning and after-tax strategies rather than marketing themselves mainly as stock pickers. Bruns noted areas such as tax planning and retirement income strategy can affect client outcomes.