Active v Passive: Dawn of Digital
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There is a certain irony to active management in that while there are many people involved all trying to put out a message, they often struggle to tell their story. In contrast, the passive community is unified; it articulates its value and really controls the narrative to the extent that active management has almost become a dirty word within retail investors and passive is now the default option in the retail space.

Retail investors often hear the pros of passive and only the cons of active but this is almost to be expected as active have done a very poor job in fighting their corner and getting their message heard. Active managers can’t depend on other players in this space such as platforms, intermediaries and wholesale investors to spread the message — in general, why would they? That’s not their role.

This should not be the case!

From a retail client’s perspective, a passive ETF, sounds complex from the offset. It’s an acronym and the definition of the fund that tracks the market benchmark or a basket of securities does not sound straight-forward. An active fund in comparison is much simpler to explain to investors. That’s is not to cast passive funds in a negative light, on the contrary — we believe they are innovative and great tools for investors; they just shouldn’t have the balance of power in the marketplace they currently hold and it all comes down to poor marketing on the side of active.

Digital technology is changing this space — the industry standard of marketing to intermediaries for active funds no longer works in a market where direct to investor sales are becoming more important and contain a bigger slice of the pie. With digital, the message can be put in the hands of the retail customer in a clear and concise way — and the mediums with which it can be shared are much wider and varied. The mediums can be used as tools to play into the investor’s natural intuition about management — focussing fully on the segment of society that is being targeted.

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In terms of storytelling, a portfolio manager’s time is important — they are never going to be able to meet all their customers so they inevitably end up meeting only the biggest investors. This may work in an ultra-high net worth space where the focus is on a few very wealthy investors but it falls apart in retail where there could potentially be thousands of small investors just trying to make a decent return on their savings. Using technology, this model can be thoroughly shaken up; with conference calls and online chats being used to talk to all of your investors at once, giving everyone the chance to speak with their manager face to face, thus taking away some of the mystery around fund management.

If you are able to communicate more effectively, the investors feel more clued in and connected to the product and are much more likely to be forgiving during rough times and more willing to top up when they have the funds to do so. They can have a full understanding of why decisions have been made and how they relate to the fees and the performance of the portfolio — even when times are negative.

It seems obvious that the more information people have, the more confident they are going to feel, especially when it is given in a format that appeals to them. However, the opposite has been true in active management for many decades as they have been ineffective communicators retail investors. This can change and it must change for active fund management to recover its reputation and truly show its worth in comparison with passive.

WealthKernel is providing digital resources for the sale and management of investments and is innovating on digital marketing strategies. As said in previous posts, now is the time to join in the digital revolution and ensure your investors are ready for the future.

Chris Barton