Asked on 20 Sep 2019
I have heard from both sides of the camp. Both active and passive. Did my fair share of research, watching debates on youtube on active vs passive, reading research papers from both camps. It seems to me that the average mom and pop investor should just allocate most (if not all) of their portfolio to passive products.
But why does the typical financial consultant in Singapore keep pushing for active funds? What is it that they are not understanding?
Just my view. I do have passive ETFs available to my clients on POEMS, and they are free to buy them if they choose. I also have actively managed UTs available on POEMS and with zero sales charges, platform or switching fees, clients are also free to buy them.
Now in my case, it is really up to the client to decide. There have been funds that have consistently beaten reference benchmarks over time, nett of fees. In such a case, why would you want to buy the ETF? Then again, there are ETFs that can not be beaten by any UT, (particularly S&P 500) in this case, won't you just buy the ETF and hold it?
Another thing to consider is the costs of investment. Buying ETFs will incur brokerage and clients need to examine the budget in order not to incur a high cost of investment. Buying S&P 500 worth US$1000 but paying US$20 + GST brokerage does not make a lot of sense.
I prefer to explain to clients the pros and cons and let them choose. After all, it is a free market. I do think there is still a place for good UTs in one's portfolio, along with a basket of other instruments like ETFs, Shares and Annuities.
Again, just my view.
Passive investments have very low fees because the agent and platforms selling them will probably also not earn much if not zero.
That's how passive investments end up better. We should see total return = fund return minus fees.
Sometimes it's not that the fund return is bad / below average. It is, however, most of the time that fund returns are not that superior and the fees too high (including the consultant and all other middleman fees) ie fund return minus fees < market average return.
I think compensation affects their advice.
Buy what they buy would probably outperform what they sell.
At the end of the day, there’s got to be some incentive for the FC to keep talking to you, looking at your portfolio, finding new products that fit your risk profile etc. I think one of the major problems is that most FCs have a limited range of products to “sell”, each with varying margins, and fairly complicated for the layman.
The other major obstacle is that I am not sure how much they know about investing to begin with, and how much “tailored” advice can they give to someone who’s investing not a lot of money. People with millions of investable dollars may be able to get very customized advice, but for the rest of us, is the advice really tailored for us? or it’s almost the same for every one of their customers: in that case, wouldn’t it make more sense just to grow with a Robo-advisor?
I think most financial consultants do not have passive products in the range of products that they can sell.
Some may have though, you have to be sure it's passive without extra hidden charges.
Most passive products, such as ETF have very low management fees and very low sales charges, which is totally not possible to have sales fees tackled on, hence there are no incentives for financial firms to sell them (including banks).
I asked my DBS bankers many times for structural products involving USA options, and passive products such as index ETF and they don't have. Only recently they announced that they would be launching new ETF funds. Looking forward to the new low-fee world. :)