Active vs Passive Portfolio Management – The Key Differences

If you’re just getting into the world of investing, it can be a daunting task to navigate your way through the many options available. We’ve prepared a quick primer for beginners to explain the key differences in the two major ways of investing, active portfolio management v/s passive portfolio management.

What is Active Portfolio Management?

As the term suggests, when investors engage the help of fund managers or wealth managers to beat the benchmark index it is called active management. In simple terms, it involves a strategy that aims to maximize returns by beating the market and assets are actively traded at a higher frequency. There’s a lot more action and risk in an active portfolio versus a passive one.

Active funds are managed by experts who keep juggling your money based on the opportunities in the market. There’s a lot of in-depth research and forecasting that goes into the process and hence the team charges a fee for their services. An active fund may give you access to a portfolio management platform and portfolio analytics so that you can get a birds-eye view of what’s happening in your portfolio. The fund managers take into consideration a large number of factors such as politics, economics, global cues and market movement to gauge the right strategy to invest your money. The fees charged by the fund manager in an actively managed portfolio is called the expense ratio of the fund which is a certain percentage of your assets being managed.

What is Passive Portfolio Management?

Passive portfolio management is also known as an Index fund management is a type of fund where the objective is to make the same returns as the index it is benchmarked against. For example, if the Sensex gains 100 points in a year, the fund is designed to mimic the same performance.

Since the idea is to replicate the index, there is no need for a dedicated team of experts to monitor the funds actively. Once the effort is made to purchase the securities, the portfolio will follow the fluctuations of the market and mimic it. There’s no additional juggling or effort on behalf of the fund manager.

As a result of the lower efforts on behalf of the fund managers, there’s little or no fee associated with it. Since these funds replicate the market movements, they are preferred as a low-risk investment and are recommended for conservative investors. These funds fall into 3 categories, unit investment trusts, mutual funds, and exchange-traded funds.

Which is better Active or Passive?

Active Management:

Advantages

  • Since the funds are actively managed by expert investors, there’s a higher chance of generating a market-beating return.
  • They come with great tax benefits as underperforming funds can be sold off quickly.
  • Since the funds are monitored regularly, any opportunities can be leveraged in real-time.

Disadvantages

  • There’s a higher risk associated as the frequency of market juggling is higher.
  • Since they require more effort, the expense ratio is higher and is borne by the investor.
  • Off late, active funds have been disappointing in terms of returns when compared to index funds.
Passive Management:

Advantages

  • Long term approach and does not require active monitoring by an investor or fund manager.
  • There’s higher transparency as it mimics the market movement, there are no surprises.
  • Lower risk and better for small investors as minimal fees are paid to fund managers.

Disadvantages

  • Limited options when it comes to investing.
  • No market-beating returns, no high alpha generated.

What is Right for You?

Based on Expectations

If you want high returns over a short or medium term, you can opt for an actively managed fund. However, if you are willing to be patient and are satisfied with risk-free long term returns that match the market, passive funds are best.

Based on Risk Appetite

If you want a high return on your investment and don’t mind a higher risk exposure then an active portfolio is the right bet. However, if you prefer a diversified fund that is lower in terms of concentrated risk exposure then passive funds are a better option.

Financial Well Being – The 2020 New Year Checklist

Yes, it’s that time of the year again, the time to make those resolutions for the year that we inevitably end up breaking by February if not earlier. Well, this isn’t cynicism speaking its facts, research suggests that 45% of people fail their resolutions by February and less than 20% make it through the entire year. And, what are these ever-elusive goals that we set for ourselves? Invariably the most common resolutions have to do with Physical Health (losing weight, eating healthy, exercising) followed by Financial Health (saving regularly, meeting goals).

Well, the most cited reason for failing at resolutions is lack of willpower, however, this year we’ll try to circumvent failure at least when it comes to our by having a game plan in place and by automating our investments.

Here’s your Financial Fitness plan for 2020, follow it rigorously and you’ll be at a much better place (financially) next year.

Step 1: Budget Better

It’s as simple as creating a monthly shopping list. You know the amount you can afford to spend, you know the essentials and you can even make room for luxuries as long as you can make a saving elsewhere. Writing down your budget with a clear allocation for monthly expenses, rent, savings, goal-based investments can help you be more fiscally responsible. You can use an expense manager such as Walnut or tally up your Bank statements to find out where you’re bleeding money. Whether it’s your morning dose of Starbucks coffee or your cigarette habit, once you see how they add up, you’ll be sure to revaluate your decisions. If you’re looking to get started with a basic budget, don’t overthink it, you can use the popular 50-30-20 rule to get started.

Step 2: Become Debt Free

Debt can be a dark cloud looming over your conscience and can affect your financial behavior greatly. Whether you’re in crippling student loan debt or paying off a mortgage, having a plan in place helps you from getting overwhelmed. If you have multiple sources of debt such as a car loan, bike loan, personal loan and the like, the best way of going about it is striking off these debts one at a time. You can start by paying off smaller debts such as your car loan so that you get some momentum and your confidence starts building up. Slowly move on towards your larger debts so that you can pay them off one at a time.

Step 3: Plan for the Unplanned

Create an emergency fund and get your Health and Life insurance in place. Yes, we know that it feels like a waste of money especially when you’re just starting off in your career but tragedy can strike at any time and it helps to be prepared. Start by creating a rainy day fund that’s at least 6 months of your monthly salary to prepare for emergencies such as layoffs. Also, start your Health insurance as early as possible, the earlier you start the lower the premiums you pay for the rest of your life. You should also invest in a Term life insurance plan as they are cheap to acquire and ensure a financial cushion for your loved ones.

Step 4: Create a Retirement Fund

We know that retirement can seem like a lifetime away, but well so did 2020 at the beginning of the year. Having a clear picture of how much money you need to have saved up for retirement will help modulate your fiscal behavior. Setting your current income as the standard, a retirement calculator will tell you how much of a corpus you’ll maintain your standard of living post-retirement.

Step 5: Diversify, Diversify and Diversify

Never put your eggs in one basket, the stock market can be a calamitous place and to weather the ups and downs of the marketplace you need to have a diversified investment portfolio. Whether it’s mutual funds, stocks, bonds, real estate or bitcoin, you need to have a sufficient “debt v/s equity” ratio to ensure that your boat is steady when the waters get choppy. It helps to have a wealth manager or a wealth management firm in place that can manage your investments for you and tell you how exactly your assets must be drawn up with respect to your financial goals.

Step 6: Automate Everything

Wealth Management platforms or investment management platforms such as Wealthfy can help make the journey towards financial health a lot easier. Trusted by the Top Wealth Managers in India such as Aditya Birla and Kotak Asset Management, it’s been voted the top wealth management platform in India. With dedicated apps for Wealth Managers and Clients, it promises a high level of transparency and brings the cutting edge of Artificial Intelligence and Robo-advisory to your 2020 financial strategy.

For more details ask your Wealth Management firm about Wealthfy today

What to Expect from Wealth Management Platform in 2020?

2020 promises to be a year of fundamental shifts for the Wealth and Asset management industry. The evolving technology landscape and digital transformation of the industry will lead to a number of significant changes in the way that wealth managers operate. Here are some of our predictions for the coming year.

Costs to stay in Business will remain high, Platforms will find new Efficiency

The costs of complying with regulations in the wealth management space will remain high. The growing cost of doing business will put continued pressure on firms to drive up profits. However, competition pressures will lead to lowered fees and cannibalization of the market. In this scenario, wealth management firms will have to invest in technology such as wealth management platform and data to maximize alpha for customers and justify higher management fees.

Passives will become core Investment Channel, Platforms will help Wealth Managers compete

It is predicted that by 2020 close to 35% of assets under management will be pooled into passive investment products such as index funds. ETFs and Mutual Funds will also see steady growth. As investors increasingly invest in passive products, actively managed funds will be under pressure to show a higher alpha. This higher alpha can only be generated if investment decisions are made on hard data that helps wealth managers make quick and reliable judgment calls that can beat the market. The power of terabytes of historical data can be leveraged by wealth managers that use Robo-advisors. These Robo-advisors can give recommendations in real-time and can raise red flags when portfolios are not performing. This will help de-risk investment strategy and help increase the chances of creating value for clients.

Platforms will help Wealth Management Firms improve transparency and gain Client Trust

Clients of today expect transparency in investment decisions. They are no longer happy to rely on Wealth Manager’s decisions alone and need hard data backing up any investment strategy. Wealth Management platform gives wealth managers all the data they need at their fingertips. This means that the chances of making decisions purely on instinct are greatly reduced, this fosters greater trust in the clients. Clients can also use Wealth Management platform to check their portfolio performance at any time 24X7 and ask the Wealth Manager questions proactively instead of waiting for a monthly call or meeting.

Platforms will help meet higher expectations of On-demand Customer Service

Clients who have grown familiar with an ‘app economy’ expect service to be available to them 24X7. In such a scenario, wealth management platform that helps customers get visibility into their portfolio data will give an edge to ‘digitally enabled’ wealth management firms. These platforms also help in automating mundane front office and back-office tasks helping free up manager time to focus on strategy and servicing their customers. This is especially crucial in a climate where over 87% of HNI clients confirm that they switch wealth management firms for lack of satisfactory customer service experience.

Mobile Apps and Customer Portals will become par for the Course

Clients of today are increasingly tech-savvy and need access to their portfolio data on their fingertips. Wealth management platform can no longer be solely facing the wealth manager, they need to have a customer-facing presence both as a portal and as an app. These mobile apps must have key functionalities such as rebalancing, portfolio monitoring, withdrawals, etc so that customers are empowered to make their own decisions. Investing in online platforms and mobile apps should be a top priority for Wealth Management firms as less than 50% of HNWI reported being satisfied with their current online and mobile financial platforms

How AI is Changing the Face of Portfolio Management

Over the past decade, the Wealth Management industry has undergone a sea change. There has been an exodus of customers with actively managed portfolios moving into passive funds and investment options. Wealth Management houses that charge a premium for active portfolio management suddenly felt immense pressure to justify their premium fees.

In the midst of this change in investor attitudes, technology has also taken the investing world by storm. Artificial Intelligence, Data, Analytics and more have given the industry an opportunity to create efficient solutions for investors and improve the efficiency of their wealth managers.  In a rush to contain costs to stem bleeding bottom lines, only the firms that adopt tech and undergo a digital transformation will emerge winners.

How does AI help in Portfolio Management?

  • Mode data more accuracy:

Earlier investing decisions were made purely on the basis of speculation on past performance. However, efficiently crunching the data and arriving at the right decision required hours of poring over company records. Now analyzing the fiscal health of a company can be done in minutes, wealth managers can create complex algorithms and weigh in a multitude of variables to support their investment thesis. From past performance, filing, financial reports, industry reports, press releases, social media buzz and more can all be factored in while making an investment decision, vastly improving the accuracy of the decision.

AI has also allowed a wide range of unstructured data to be accounted for in the investment thesis. Data such as digital footprints, credit card data, cookies, store circulation data and a range of other factors can now be quantified and added to investment models to predict the investment outcomes.

  • Automation of cumbersome Middle & Back office tasks:

Artificial intelligence although touted as the enemy of the workforce is far from it, in fact, AI will help complement Middle and Back office workers and help automate ‘minimal value add’ and process-intensive tasks such as trend analysis, report generation, writing macros and more. Tasks such as Customer KYC, background verifications and more can also be easily automated helping the workforce focus more on strategy and research to generate alpha for their clients.

  • Minimizes risks:

AI acts as a defense against fraud as it’s able to monitor transactions and cross-checks it against historical data in real-time. Algorithms can be set up to flag suspicious behaviors based on each Wealth Management firm’s standard operating procedures. Even if there are millions of transactions taking place on a day, AI will easily be able to sift through and flag the ones that need to be inspected.

  • Improves customer service:

Earlier if any client had to receive a report about their portfolio, this would require hours of manual work to compile and gain insights. Today’s advances in Natural Language Processing and pattern analysis means that reports and portfolio management commentary about investor portfolios can be down within seconds and mailed to the client. The best part is that there’s little to no waiting time and the investor can check the status of their investment in minutes.

  • On-demand support:

Customers of today are used to an on-demand economy. In the app-enabled world, everything that the savvy customer of today wants is within reach at the click of a button. This expectation of instantaneous service has seeped over into the wealth management space. However, human wealth managers who are already burdened with long work hours cannot be expected to be available to global clients 24X7. The next best thing, however, is AI, Machine Learning enabled chatbots are now able to respond to common investor queries and handle basic requests such as generating reporting or providing status updates. These chatbots can also be configured to collect as much information is necessary via support chat and email it to the wealth manager’s so that they can take an informed decision and not spend additional time trying to gather the facts from the investors

For More Enquiry Talk to Our Experts .

Predictive analytics in wealth management The new normal

The wealth management landscape is ever-evolving and wealth management firms of today are increasingly adopting cutting edge technology to cater to tech-savvy millennials. The expectations and preferences of today’s clientele such as increased insights, automation, and 24X7 customer service can only be met by leveraging smart tech.

Investment managers of today are investing in wealth management platforms with AI-enabled advisory and predictive analytics to cater to these demands. The latest report by BCG on the wealth management landscape stated that 75% of wealth management firms are investing heavily in big data and analytics to meet evolving customer demands.

One of the major innovations in the space in the last decade is predictive analytics, which basically means the use of historical data to determine and predict the relationships between different variables in the wealth management process. Predictive analytics helps build models and processes that optimize the wealth management process, introduce high automation, and predict asset failure.

Predictive analytics is a space that is seeing huge growth in the market due to the value they provide to wealth managers in terms of cost savings and process efficiency. Using predictive analytics at different stages of the customer funnel is helping wealth management firms keep pace and deliver the coveted ‘high touch’ experience that clients have come to expect.

Here’s how predictive analytics is transforming the wealth management space:

Aligning business strategy

Predictive analytics helps wealth management firms anticipate investor demand, life events, attrition, investment patterns and more. This can help firms align their business and their product offerings according to this data to limit attrition and improve investor retention. It also helps firms understand investors with the highest risk of leaving and the highest lifetime value, so the managers can take appropriate action and effort to minimize the risk to AUM.

Data-driven intelligence

Robo advisory is being offered as part of the wealth management services which recommends portfolios for each financial goal by blending Robo capabilities with human intelligence. This automation helps in streamlining the process for wealth managers by eliminating redundant tasks.

Smarter client acquisition

Predictive analytics enables wealth management firms to customize their products and offer more targeted services to their clients. It enables them to recognize HNI clients and create custom investment opportunities for them. It also helps drive customized, personalized.  and intelligent customer communications. From email communications, sales calls or message communications, analytics helps personalize them to offer a seamless experience leading to higher client acquisitions.

Exceptional customer service

Predictive analytics helps wealth managers give customers contextual advice. It helps wealth managers predict customer needs and approaches them with the right solution at the right time. Big data can be used to mine customer behavior through surveys, market patterns, risk levels and more to help provide tailored advice that customers appreciate. It also helps wealth managers make real-time recommendations, investment ideas, and financial plans in minutes, instead of hours.

Helps the research process

Predictive analytics and NLP can help asset managers make sense of vast unstructured and structured data sets. It can help managers understand patterns and trends in the data and make smarter decisions based on this research. This helps asset managers save on hours of time that they would have spent parsing through the data.

Higher visibility into operations and reduced costs

Digitized wealth management platform will help wealth management firms optimize processes and reduce back-office costs through better human capital management (optimizing hiring process), optimal demand management (optimizing effort based on customer lifetime value), and reduce due diligence costs through next-generation digitized KYC. These optimizations will help keep firms competitive and help the bottom line in this cut-throat market.

What does the future look like?

As wealth management platforms grow more and more sophisticated, the high investment in AI-based models means that they will become even more accurate. This means that investors can expect more personalized and better service from their advisors. Wealth management firms will be able to leverage these insights to create better opportunities and drive superior performance for investors. Firms that fail to leverage analytics will underperform and eventually will not be able to keep up with their tech-savvy competitors. However, those who do invest heavily in AI at this stage will capture a lion’s share of the millennial investor base.

Here’s Why you Need Hybrid Advisory for Investment Management

The introduction of Robo Advisory has received mixed reactions from wealth and investment managers.

While the tech-savvy managers have been quick to appreciate the value of this automated process, others assumed that this technology will make their jobs redundant in the future.

What is Hybrid Advisory?

Understanding the flow of money and making decisions based on the movement of the market comes with years of experience and in-depth research of assets, portfolios, and the market itself.

With the help of Robo Advisory, Investment Managers can recommend tailor-made portfolios for each financial goal, fasten the tedious task of onboarding customers, generate intelligent insights and rebalance portfolios with ease.

It adds an edge to advisory through intelligent portfolio insights, becoming an addition to the Investment Manager’s arsenal.

So, should Investment Managers be concerned about Robo Advisory?

On the contrary, they have reason to rejoice, because Robo-Advisory by itself is just a sophisticated product but partner it with an investment manager and what you have is Hybrid Advisory.

Here’s why:

It Improves Decision-Making

This is a collaborated approach to investment with the use of technology and human intelligence. The Robo advisors scan through terabytes of data to convert it into actionable insights.

It helps in leveraging big data to simplify the decision-making process in a cost-friendly way. The time which remained a constraint for investment managers is strategically handled by automating the operation procedures.

It Democratizes Investment Management

Wealth Management and Investment advisory have always been luxuries that only the affluent could afford. People who had amassed wealth over the course of their entire careers would go to wealth managers and investment managers for advice on where to invest their money.

Now, automated advisory for smaller amounts can take care of the clients that are in the primary stage and are still getting used to the market. Investment Managers can have potential clients in the pipeline long before they speak to them.

Valuefy is helping Investment Managers get on-demand, comprehensive analytics from historical and real-time data to make informed decisions generating better returns on the investments.

Valuefy is a FinTech company that enables Wealth Managers and Investment Managers with technological solutions to ensure the digitalization of their processes and empower them with comprehensive analytics, Portfolio Management solutions, reporting, and relationship management

5 Reasons Wealth Managers need a Technology Partner

Maybe you are a veteran Wealth Manager, a rookie or somewhere in between. Being in the industry, you must have heard about the disruptive technologies that are changing the sector of Wealth Management.

Well, the news is true as Wealth managers around the world are partnering with Fintech companies to adopt innovative technology solutions. It’s improving the efficiency and productivity of their firms and driving their performance.

Let’s take a look at the 5 major reasons why a Wealth Manager needs a technology partner.

Automation

One of the biggest advantages of technology is automation. Technologies like Big Data, Analytics, and AI are offering real-time data, easy access to information, and faster report generation which cuts down the time taken for decision making.

Automation in Wealth Management allows you to finish time-consuming tasks, like generating portfolio insights and reports, in minutes. It enables smoother operations making your job a lot easier. A ROBO assist platform aids Wealth Management in generating portfolio insights and collecting data in an organized way that also leads to a reduction in costs.

Customer Relationship Management

Customer relationship management is at the heart of a successful Wealth Management firm and it can be enhanced using user-friendly technological solutions that provide both ease and accessibility to the portfolio and analytics.

A technology platform, like Wealthfy, adds convenience to processes like Client Onboarding, Portfolio Construction, Portfolio Monitoring, Reporting, Analytics, and Rebalancing. Providing customers with on-demand analytics is another feature that can prove to be very inviting for a wealth manager.

Data Analytics

Wealth Management is built on data. Analyzing and studying historical and real-time data is a crucial part of making decisions that drive returns. Technology platforms perform these functions quickly while increasing the productivity of Wealth Managers.

Solutions that provides analysis of different classes of Assets in a portfolio helps you decide on the expected returns and risk factors of various assets under one platform. Moreover, these platforms support different styles of portfolios, widening their functionalities.

Multichannel Delivery

Smartphones have helped in garnering a deeper penetration across the market. The company-customer relationship has become more personal, making it easier for customers to reach out to the companies more easily.

This has increased the expectations of the consumers who now want to have multiple delivery channels to stay updated on the go. Effective mobility solutions can make this possible by integrating mobile-based solutions into the legacy systems at the Wealth Management firms allowing your customers to keep track of their portfolio and receive prompt alerts.

Customization

 When you customize your platform for your workflows, you make its adoption easier for your customers. It helps you customize advisory and recommendations based on the goals set by the client. This individualistic approach provides a personalized service without taking much time.

Why is the Technical Evolution Welcomed?

The world is changing faster than ever before and this evolution does not intend to cease. Catching up with intelligent technological solutions will only enable you to serve your clients faster and with more precision.

Today’s Wealth Managers are seeking intelligent technological solutions that understand their requirements and aid in bringing down costs, time and an increase in their productivity. Overall help them predict better that in turn help them service their client needs better.

Valuefy is a FinTech company that enables Wealth Managers with technological solutions to ensure the digitalization of their processes and empower them with comprehensive analytics, Portfolio Management solutions, reporting, and relationship management.

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