Despite the geo-political risks and volatility in the markets and the predicted end to American exceptionalism, which has seen many commentators flag the need for active management going forward, paraplanners are continuing to back passive investment strategies, according to our recent Parameters survey.
The majority of paraplanners (70%) responding to a the survey said they believe passive funds can continue to perform for investors as they have done in past years. However, 26% said they were unsure.
Nearly all respondents (90%) tended to use a mix of active and passive funds in their investment strategies, with just 5% opting for a purely active or passive strategy.
One of the biggest advantages paraplanners cited when recommending passive funds was cost-effectiveness, with passive funds having lower management fees compared to actively managed funds. For clients, this means a higher proportion of returns stay in their pocket over time. Paraplanners also argued that the lower cost base of passive investments can often lead to better net performance, especially when active managers struggle to outperform their benchmarks.
As one paraplanner put it: “Passive funds do what they say on the tin. If the fund is invested in the correct market, they will continue to provide the returns in the same manner that they have done previously.”
With the majority of portfolios targeting long-term, strategic asset allocation, paraplanners said that for clients invested for the long haul, passive funds often are sufficient to meet their goals. Over time, most markets trend upward, and paraplanners said that trying to time the market or pick consistent outperformers among active managers can be costly and ineffective.
As another paraplanner noted: “Most clients are invested for the long term, so we believe that strategic asset allocation is a more appropriate strategy.” Passive funds fit neatly into this philosophy, tracking market performance over time with minimal intervention and lower risk of manager underperformance.
However, despite the strong support for passive strategies, very few paraplanners advocated an exclusively passive approach. Instead, a blended strategy, combining active and passive funds, is the preferred route. This approach allows paraplanners to manage costs effectively, while still capturing the potential upside that active managers can bring in specific market conditions or niche areas.
For example, paraplanners said they use passive funds for core market exposure and active funds as “return enhancers” in areas where active managers may have a better chance of adding value, such as small caps, emerging markets, or alternative assets.
Client preferences were also cited as having an influence in the use of passive strategies. Many clients are cost-sensitive, particularly in a world where fee transparency and value-for-money are under increasing scrutiny. For such clients, passive funds are an attractive proposition.
Paraplanners also said that passives are “well-suited to investors who are comfortable with market returns and do not want to take on additional risk in the pursuit of alpha”. They offer a straightforward investment story and appeal to clients who prefer low-cost, low-maintenance solutions.
Additionally, with discretionary fund manager offerings now including passive, active, and blended ranges, firms can tailor investment solutions more precisely to each client’s needs.
One of the key concerns raised about passive strategies is whether they will continue to perform as well as they have in recent years. While performance is inherently linked to market conditions, paraplanners generally agree that passive funds will continue to deliver in line with market movements.
Although, some expressed caution. As one paraplanner said: “If market conditions shift, such as prolonged periods of low growth or higher volatility, passive funds might not perform as strongly as they have in the past.”
However, others argued that even during downturns, most active funds still fail to outperform their benchmarks after fees, making passive strategies “a safer bet for many clients”.
Do you feel passive funds can continue to perform for investors as they have done in past years?
Yes 70%
No 4%
Unsure 26%
