The findings in this blog post come from RIA in a Box’s annual survey of approximately 1,500 registered investment adviser (RIA) firms, which was conducted in the first half of 2023.
In the kick-off blog for our 2023 survey series, we will cover the types of portfolio management styles available to RIAs, and more importantly, which style is favored among your peers.
What are the types of portfolio management styles?
Portfolio management styles are defined as the primary investment management style a firm uses to manage its clients’ assets, and can be broken down into three categories:
- Active: Taking an active approach typically involves engaging in the buying and selling of securities in order to achieve better results than a benchmark index. Companies that adopt an active portfolio management strategy may utilize mutual funds, exchange-traded funds, individual securities, or other similar investment products. Nevertheless, irrespective of the specific investment vehicle, the primary objective of the company remains centered around surpassing the performance of an index.
- Passive: Adopting a passive approach generally involves using index funds or comparable investment instruments, such as exchange-traded funds, to replicate the performance of an investment benchmark index.
- Hybrid: As the name would imply, a hybrid firms will employ both active and passive portfolio management styles and solutions.
What portfolio management style is favored by RIAs?
Interestingly, the percentage of firms employing an active portfolio management style did shift downward this year, however, it remains the favored management style among the options with 38% of firms employing an active portfolio management style. This compares to 35% in 2019 and 40% in 2021.
Firms employing and solely passive portfolio management style increased this year, with 21% of respondents stating they employ a passive style. Comparatively, 22% of firms cited they used a passive style in 2019 and 18% of firms cited they used a passive style in 2021. While this increase does show a slight move towards this style of portfolio management, passive remains the least utilized style of portfolio management.
Why might firms employ a passive portfolio management style? Advocates for passive portfolio management argue such an approach allows firms to reduce complexity and increase scalability, while also often reducing performance volatility risk for their clients.
Interestingly, while the percentage of firms employing a hybrid portfolio management style has continued to decrease, it remains closely in competition for the most used portfolio management style. This year 36% of firms cited they employ a hybrid style, compared to 43% in 2019 and 38% in 2021.
Tune in next week for a look at which risk tolerance systems have gained popularity among RIA firms.