3 Questions to Ask When Considering An Active Fund Manager

by Business Insider | September 12, 2013 11:00 am

Active management tries to beat the market, while passive management tries to mirror the market. After the financial crisis there has been a loss of confidence in active management, as passive investing strategies have outperformed.

Daniel Wallick of Vanguard which is known to champion indexing, says there are three pre-requisites for successful active management.

1. Low cost – “low cost is the only thing we know ahead of time that can improve the odds of investors in outperformance. We’ve looked at a variety of different factors. We’ve run analysis and, really, the only thing we know ahead of time that can improve odds is low cost.”

2. Talent- “low cost alone won’t guarantee outperformance, and that’s why you also need to be able to acquire talent.”

3. Patience – “given the relative inconsistency of any outperformance—and this is true for all managers—you also have to have patience to live with those decisions.”

“Let me just give you one set of numbers around the patience decision. We looked at all the active funds over the last 15 years, and we found that 18 percent of them outperformed.

Practically all of them had at least five years where they underperformed through that 15-year period. So practically all of them underperformed for a third of the time. Now, these all ended up being long-term winners.

Of those that outperformed, two-thirds of them also had three consecutive years of underperformance. Using the three-year track record as a reason to get rid of somebody: That actually would have kicked out two-thirds of the winners along the way.”

How To Check On A Financial Professional ‘s Title (SEC/NASAA)

The SEC And North American Securities Administrators Association (NASAA) together have released an investor bulletin reminding investors to be cognizant of the difference in titles and licenses. This is because some titles require professionals to pass exams and meet certain ethical standards, while others require very little effort. To check their credentials and the SEC and NASAA urge investors to ask the following questions.

1. “Who awarded your title?”

2. “What are the training, ethical, and other requirements to receive the title?”

3. “Did you have to take a course and pass a test?”

4. “Does the designation require a certain level of work experience or education?”

5. “To maintain the designation, are you required to take refresher courses?”

6. “How can I verify your standing with this organization?”

Focusing on some key aspects of finding the best advice out there is well worth the time. Ask the right questions and do the right research and you can find confidence in your financial advisor.

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