Why Passive Portfolios Thrive—and Where Advisors Still Add Value

In recent years, passive investing has gained significant popularity, particularly through low-cost, well-diversified ETF (Exchange-Traded Fund) portfolios. In Belgium, the term "hangmatbeleggen" (Dutch for "hammock investing," referring to this relaxed investment approach) was even named the word of the year in 2024.

This style of investing is appealing, as research consistently shows that active investors — those attempting to beat the market through stock selection or timing — rarely outperform passive strategies. Passive investment portfolios provide broad market exposure, are cost-effective due to lower management fees and require minimal oversight.

Moreover, with the growing popularity of ETFs, investors can now choose from a wide range of options, tailoring their portfolios to match their risk profile, investment horizon and personal preferences. A typical passive portfolio offers long-term average returns of around 7-8%, outperforming inflation and many traditional banking products. However, the emphasis must remain on the "long-term," as short-term market volatility can lead to significant losses. For example, an analysis of the MSCI World Index (used as a basis for several ETFs) over the past 45 years reveals:

• A 1-month investment yields a 65% chance of positive returns.
• A 1-year investment yields a 73% chance of positive returns.
• A 5-year investment yields an 82.5% chance of positive returns.
• A 10-year investment yields a 91.2% chance of positive returns.
• A 20-year investment ensures a 100% chance of positive returns.

So, why do some investors still opt for active fund management or financial advice when passive strategies often deliver comparable, if not superior, results?

The answer lies in personalization. Investing is not purely about numbers and financial advisors are not just hired to maximize returns. Instead they provide advice, coaching and guidance and they offer comfort, trust and peace of mind on a topic that many find stressful. Advisors bring value through several layers of customization, including:

• ETF Selection: Even in a passive strategy, selecting the right ETFs from the vast array of options requires expertise. Advisors can guide this process to ensure alignment with the investor’s goals.
• Ethical, Religious and Sustainable Preferences: Many investors seek portfolios that align with their values, whether through ESG factors or avoiding specific industries. Financial advisors help craft these tailored portfolios.
• Managing Inflows and Outflows: Passive portfolios are not inherently designed to handle regular contributions or sudden withdrawals efficiently. Advisors help manage these transactions to maintain balance and avoid unnecessary costs.
• Tax and Legal Optimization: Strong pre-tax returns can be undermined by poor tax planning. Advisors assist with structuring portfolios to minimize tax liabilities and accommodate legal considerations.
• Investment Coaching: Advisors help clients navigate emotional challenges, providing behavioral coaching to avoid impulsive decisions during volatile markets.
• Holistic Financial Planning: Investments are just one component of the larger financial puzzle. A comprehensive financial plan integrates investing with other key elements, such as estate planning, insurance, and retirement strategies.

Even when opting for passive investing, it should not be viewed in isolation but as part of a holistic financial management approach. This involves assessing both current and future financial budgets. E.g. maintaining a financial buffer—equivalent to six months of living expenses—is crucial to cover unforeseen costs.

Similarly, large anticipated expenses must be planned for in advance to avoid liquidating investments at an inopportune time.

With the rise of robo-advisors, the landscape of financial advice has however also shifted. While robo-advisors offer algorithm-driven portfolio management at lower costs, they often lack the depth of personalization needed for complex financial situations. They excel in managing day-to-day tasks like portfolio rebalancing and handling cash flows but fall short in areas like tax efficiency, estate planning, and ethical investing. Crucially, they cannot provide the human connection and trust that many investors value.
Studies back this up. A 2020 survey of 3,000 individuals revealed that the top reasons for hiring a financial advisor were peace of mind, access to expertise, and delegation of complex decisions — maximizing returns only coming after those.

Looking ahead, a hybrid approach that combines the best of both worlds is likely to become the norm. Investment portfolios will primarily rely on low-cost passive strategies, with a portion allocated to active funds to address specific preferences and needs. Management of these portfolios will also blend low-cost automation through robo-advisors with personalized human advice. Robo-advisors will handle routine tasks efficiently, while human advisors will provide support for significant life events, complex financial planning, and emotional guidance.

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