He said: “We have very, very slightly more money in active than passive, but in the past year we have put more money in passive. We are genuinely agnostic but if you look at the financial planning versus financial advice debate many adviser firms will sell products and investments which will probably lead to an active strategy.
“However if you are a financial planner then your product is a financial plan and peace of mind. While you can’t ignore active, performance becomes less of a priority.
Mr Cunningham believes the RDR achieves the move from selling investment performance to selling a financial plan, and that this change in approach bumps the active-versus-passive debate down the priority list.
As with Alan Dick, control is another prime concern for Mr Cunningham, and predictability is all the more important when selling peace of mind to your clients.
Mr Cunningham said: “Why would you want to sell something to a client that isn’t completely in your control?
“What logical person would set their client’s expectations to be measured against something you can’t control? We can control the frequency of our views, but the second we start making promises about active there’s going to be some element of randomness.”
Commenting on the recent research which found actives outperformed passives when weighted according to size, Mr Cunningham argued: “A lot of passive advisers say if you look at average funds they don’t outperform and I would say don’t pick the average fund. If you look at the funds that are the most popular, funnily enough they are outperforming.
“A lot of funds are zombies and essentially passive, but called active.”
When you cut out these zombie funds, active funds suddently appear much more effective.
However, he added: “The only thing I can guarantee is this passive fund here is cheaper than this active fund here. That is where the argument for passive wins, because you can say to a client categorically that this is a cost.
“The cynical people will say keep the fund charges as low as you can and charge as high as you can.”
Risky business
For Philip Bailey, investment consultant at Assetfirst, cost and control are important factors but of secondary importance in the debate. Rather it’s the difficulties presented by active funds to risk-rated portfolios that make them less appealing than the more predictable passive funds.
He said: “More and more people will focus more and more on the cost. The lowest passive costs now are coming in at around 10 basis points versus the traditional active rate of 100 to 200 basis points.
“It’s great but it’s the secondary reason to use passives.
