The findings in this blog post come from RIA in a Box's annual survey of approximately 2,000 registered investment adviser ("RIA") firms, which was conducted in the first quarter of 2022.
In this post, we cover the adoption and differences observed among RIA firms which use different portfolio management styles. Portfolio management styles are defined as the primary investment management style a firm uses to manage its clients’ assets - active, passive, or hybrid (a mix of both active and passive).
Portfolio Management Styles
RIA firms determine whether to manage client investment portfolios with an active, passive or hybrid management style. An active approach generally implies buying and selling securities with the intent of outperforming an investment benchmark index. Firms which employ an active portfolio management style may use mutual funds, exchange traded funds, individual securities or various other types of securities products. However, regardless of the investment product, the firm is focused on trying to outperform an index.
A passive approach generally implies utilizing index funds or similar investment vehicles, such as exchange-traded funds, with the intent of mirroring an investment benchmark index. Hybrid firms, in terms of portfolio management style, are not absolute in their investment philosophy, and may offer a mixture of passive and active portfolio management solutions to their clients (e.g. a core and satellite investment strategy).
In our latest survey, we continued to see a downward trend in passive and hybrid investment management styles and a resulting shift in RIA firms using an active investment management style. According to our survey results, 35% of RIA firms used an exclusively active portfolio management style in 2019 compared to 40% in 2021. Alternatively, firms deploying an exclusively passive portfolio management style steadily decreased, from 22% in 2019 to 18% in 2021. 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.
In 2021, 38% of investment advisory firms used a hybrid investment management style, compared to 41% in 2020 and 43% in 2019. This short-term uptick may, however, be an anomaly, due to the volatility in financial markets
For the past few years, a hybrid investment management style has been the most popular choice among RIA firms. Our study shows the ongoing shift toward active investment management has reached a turning point, becoming the most common portfolio management style.
Check back in the coming weeks as we continue to release more sneak previews from our upcoming Investment Adviser Industry Report, which focuses on growth, technology, investment styles, and advisory fees.