The RARE Advisor: Trump Card Portfolio Design

There is a huge philosophical void between active management and passive management when it comes to running portfolios - either for your client by you personally, or the client doing it by themselves. Now, generally speaking, you would assume that there is a lot more passive management taking place out there because of the huge institutions that are really behind the movement of passive management. But, there are probably more active managers out there than there are passive, because you need more people involved to actively manage things. And it tends to be at smaller overall sizes. So in other words, the ETF for the passive tracking of the QQQ for the NASDAQ 100 or for the S&P500, those are just monster size mutual funds and ETFs. The actively managed stuff can be big, too. Obviously, there's exceptions to every rule, but as a total they tend to be a little smaller in size.

Then, there are philosophical changes and differences on what you think. I tend to lean a little more towards active because I want someone monitoring and taking control of the situation; I don't want to just ride and coast through the next financial crisis. And when you're on the passive side, the argument is that active advisors can never time it correctly, and so on and so forth, so you're better off just staying still. So you can fall in whatever camp that you like on that. Now there are times when it moves, which is what we're going to talk about in a moment. After a financial crisis, a lot more money kind of moves towards active. And once things are hunky dory for a long enough period of time, things start going back towards passive - which is what's kind of going on right now. But, what I really want you to think about is risk management. I kind of talked about active management as if it has a risk component (doesn't always), that's what I mean. Really, there's almost a third category - there's risk management. Whether it's passive or active, I want to know if somebody hits the alarm that we can move out of equities, for example, and I can sidestep things like the financial crisis. 

There was a study recently completed from Cerulli Associates looking at Morningstar Direct information. I wanted to share this one simple chart, because I want to show you how close, how neck and neck, this is. This is total active (doesn't matter whether it's funds or ETFs) in millions. So 13 million millions of dollars sitting in active management. Passive management has 13 million millions of dollars sitting there as well. They're almost an identical number. But look at what has happened here in 2023. In 2023, we had a huge negative outflow from active and a huge positive inflow into passive. Again, the markets been doing really well. When the market is doing well, that's what happens.

So there is a thought that you need to have as a financial advisor, and you need to understand - especially if you tend to lean more towards the passive camp. And that is that when people get sick, that's when the doctors are needed most. Right? When people are healthy, they're not calling their doctor just randomly because they want to chit chat. When people get sick, that's when they go to the doctor. When markets crash, that's when people need financial advisors. That's when people need active management. When the sun is shining, passive is just fine. I'm perfectly healthy. I don't need to go see the doctor. But when things aren't so good, that's when you earn your keep as a financial advisor.

Regardless of whether you want to fall in the active camp or the passive camp, what I will contend is that you need to consider risk management. Whether that risk management is laid atop passive or laid atop active, what you really need to focus on is risk management. Because when people get sick, we want to make sure we have the cure, that we have the proper medicine. So, consider risk management. We run a TAMP program - we've got all kinds of different strategies from all kinds of different asset managers on there. But again, the most popular stuff in there tends to be that which has good risk management.

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The RARE Advisor is a business model supercharged by Recurring And Repeatable Events. With more than thirty years of working with and coaching successful advisors, host Mike Walters (along with other leaders in the industry), discusses what it takes to grow a successful practice. With the aim of helping financial professionals and financial advisors take their business to the next level, Mike Walters shares insights and success stories that make a real impact. Regardless of the stage of your practice, The RARE Advisor will provide thoughtful guidance, suggestions for developing systems and processes that work, and ideas for creating an authentic experience for your clients.

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