Let’s party like it’s 1995.

Active management and old-school stock picking could be poised for a comeback after nearly 30 years of passive dominance. Higher interest rates, greater stock dispersion and heightened volatility are providing the “key ingredients” for active investors to potentially outperform markets, according to T. Rowe Price. In fact, the tide may be turning, with active management becoming more important than ever, said Monica Dwyer, CFP with Harvest Financial Advisors. “Portfolio management is the unsung hero of our RIA,” she said. Passive investing can even lead to “diworsification,” when portfolios become too broadly diversified and returns suffer, she added.

Kick It Old School

For a long time, wealth management was about beating the markets and finding alpha that ordinary investors couldn’t find on their own. But over the past two decades, financial advisors have placed greater emphasis on financial planning, thanks to the adoption of model portfolios and the popularity of passive investing. These approaches not only provide healthy returns, but also free up time for advisors to focus on services like tax, estate and long-term care planning, as well as budgeting and cash flow analysis. Many believe this holistic model is key to building stronger client relationships and staying competitive.

But advisors are starting to realize that doesn’t mean investment management is less important today, it has just become simpler and more automated. Many advisors now outsource portfolio construction:

• Assets in model portfolios reached nearly $8 trillion in April of this year, according to Broadridge Financial Solutions.
• More than eight in 10 fee-based advisors use models for at least some of their client assets.

Active investing, by contrast, is notoriously difficult. Over the past 15 years, roughly 90% of active funds have underperformed the S&P 500. But that doesn’t mean advisors aren’t taking advantage of the current market conditions. Kimberly Abmeyer, founder of Abmeyer Wealth Management, said her clients’ portfolios are outperforming the S&P 500 by 10% so far this year, thanks to targeted stock selection.

“We’re opportunistic investors focused on high-quality companies and fiscally responsible management teams,” she said. “It’s not necessarily done with the intent of outperforming, but just trying to find the right opportunities and sectors to focus on.” She added that active management can also reduce costs by cutting out third-party fees.

It’s a Tough Job. Still, active investing isn’t for everyone. “It’s a tough task, and people can try it, but it usually doesn’t end quite as well as they expect,” said Don Bennyhoff, founder of Bennyhoff & Co. and former senior investment strategist at Vanguard. He noted that model portfolios frequently get unfairly labeled as “cookie cutter,” when in fact, real alpha often comes from helping clients find tax efficiencies. “Those are things many advisors overlook, and probably should emphasize more, instead of trying to beat the market,” he told Advisor Upside.

Democratization is the word on the street in private markets, and Morgan Stanley knows it.

The investment bank has bought EquityZen, a company that lets investors buy and sell stakes in private companies. EquityZen bills itself as a way for investors looking to get into private assets to get in contact with equity shareholders of private companies. The deal will enable Morgan Stanley advisors to offer clients private investment opportunities in companies that aren’t available anywhere else. “Companies are staying private longer and longer,” EquityZen CEO Atish Davda said in an interview with Yahoo Finance. “The number of publicly listed companies continues to be at an all-time low, and so if you’re an investor only investing in public stocks, you’re missing out on where more value creation could be occurring.”

Put to (Morgan Stanley at) Work

It’s all part of a private markets trend that is seemingly taking over wealth management. In 2019, Morgan Stanley acquired Solium Capital, a Canadian software-as-a-service platform, and rebranded it as Shareworks; it has been used by private companies since 2021 as an equity compensation platform. Shareworks is part of Morgan Stanley at Work, which offers both public and private companies’ employees retirement plans, financial education tools and other services. The deal will increase their access to private shares and give Morgan Stanley at Work participants more liquidity options, according to a release. Terms of the deal were not disclosed.

“[Morgan Stanley has] been servicing private companies for a very long time,” Davda said. “The piece that’s been missing is the piece that connects all of that supply to the demand side.”

More Privates Please. The deal is also representative of the broader goal of democratizing access to private investments across wealth management. Last year, BlackRock folded in data on some 200,000 private investments in a $3.2 billion deal with UK-based data and analytics firm Preqin, and demand for the asset class has been rising. Part of the allure is accessing the more than 95,000 private companies that have annual revenues of over $100 million, compared to the roughly 10,000 publicly listed ones, according to research from Russell Investments.

As AI continues to make headlines, one of the most well-known tools, Chat GPT, recently surpassed 700 million weekly active users. In financial planning, that means AI is evolving from back office to client-facing.

Firms now embed AI assistants into workflows to draft meeting notes, prep follow-ups and update CRM records (with client consent, of course). Some 68% of advisors already use AI applications, and 43% plan to increase their investment, according to a wealthtech survey by Orion. Reflecting this momentum, the CFP Board has offered guidance on innovative practices, with the incoming Board Chair-Elect focused on helping advisors embrace AI with confidence and optimism. To illustrate how advisor and AI roles are evolving, consider a recent test wherein ChatGPT was tapped for assistance producing a flowchart. Instead of delivering the requested graphic, it proved that AI, with its many strengths, still has limitations. (More on that later.)

Read more.