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Fee-free, passive funds are attractive, but it’s about more than beating an index.

Fee-free, passive funds are attractive, but it’s about more than beating an index.
Last summer, Fidelity Investments became the first financial company to offer no-fee index mutual funds, and quickly attracted about $1 billion into two portfolios. This has several implications for wealth management companies, and for investors.
 
The funds the company is offering — one each focusing on U.S. and international stocks — are passive funds; they are built to mirror a market index. Active strategies, on the other hand, comprise stocks chosen by an advisor and their team of analysts.
 
Passive funds are a lot cheaper than active funds, and over the past five years, they’ve had a stronger growth rate, partially because the fees are lower. They are the go-to product for millennials who have just begun investing. The thinking goes: ‘When the market is as strong as it is, why would I pay someone more to choose stocks for me?’ This product is starting to creep into the bigger money, too. The landscape has changed: clients are savvier, they do their own research, they check out the competition.
 
So there’s this race-to-the-bottom mentality. Financial advisors and wealth managers are going to have to look at their businesses and find ways to add value. They will need to add services, and/or find other services they can monetize. These services might include budgeting analysis, retirement planning, or preparing a comprehensive financial plan for an individual.
 
Investment firms are going to have to start being creative. They will have to find ways of going to the client with a full-blown, goals-driven strategy that shows them not only how to get from point A to point B, but why.
 
Investment management is only a piece of what we do as wealth advisors at Coral Gables Trust Company. It’s also about knowing there’s a purpose behind what we do for the client, after finding out what’s important to them in the short, medium and long term. It’s about building the client’s perspective and goals into their portfolio.
 
Some historical perspective: these passive stock funds have come to flower in a bull market that has been running for some eight or nine years now. We’ve had some minor bumps in the road, but nothing substantial causing investors to be concerned of a long-term market retreat.
 
Low-cost funds work in a bull market, but then again, everything tends to work in a bull market. We haven’t had any market downturns that lasted more than a few weeks. If we were to have a correction that lasted six months plus, or the return of a real bear market, you’d want reconsider investing in fundamentally high-quality actively managed strategies. Active strategies have shown to hold their ground better during negative markets which usually leads to better downside protection. Having experienced the downturn of 2008 as a wealth manager, I can confidently say that aligning portfolios with active investment strategies provided more downside protection compared to cheaper passive indexed strategies. In situations like that, it’s important to have professionals like those at Coral Gables Trust Company as your partners.
 
The bottom line is, fees aren’t everything. When it comes to financial planning, people — and the experience, skills and knowledge they can offer you — are worth it.
 
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