There has been so much written and debated about whether you should invest in lower cost passive funds or higher cost active funds.

If you have a financial adviser then it will be the cornerstone of the every piece of investment advice they give.

To remind you, passive funds aim to track an index such as the FTSE 100 and nothing more. They will use systems to do this and so can run their funds in a fairly low cost way. What you get is the market rate of return minus their costs. Active funds will be a bit pickier about what they invest in, in an attempt to beat the index. To do this they need to undertake a lot of research which costs money and therefore the funds cost more to hold.

To me, in simple terms, costs are a certainty whereas performance is not. If you put aside the research that suggests that good active funds fail to outperform the market for extended periods of time, and bad ones never get around to outperforming the index at all, then costs alone matter.

Essentially, with an index fund you are accepting the market rate of return and paying a low cost fund to achieve that for you. With an active fund you are paying sometimes far more in the hope that the fund you or your adviser has chosen will do the job.

Even if you decide active management is for you, then you have to pick the funds that actually will outperform in the future, not the ones that have outperformed in the past. With more funds than shares in the world (a bizarre statistic) there is quite frankly a massive choice.

Financial advisers have traditionally given it a good go at picking those funds that will perform well for you and I will leave it to you to decide what sort of job they have done if that applies to you.

In the past, if we set aside one’s investment philosophy, then active funds with their higher charges have always kind of suited everyone too. The annual management charge the fund manager levies has been used to feed the mouths of various different interested parties including financial advisers, fund platforms and supermarkets and yes, the fund manager too.

This, in my opinion, is set to change. Now that financial advisers have to agree with their clients what they will charge for the advice and ongoing service they provide, they have no ‘convenient factor’ attached to the commission previously received from actively managed funds with their higher charges.

This leads many to believe lower cost funds will suddenly become more popular or palatable as a recommendation (funny that) as advisers and platforms can no longer bundle their charges into one, simple annual charge in the name of the fund manager.

Watch this space!

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Blog by Jaskarn Pawar

Jaskarn Pawar is an experienced and award winning Chartered and Certified Financial Planner. He advises people all over the UK on financial planning and wealth management issues to help them reach solutions to fit their personal needs. You can contact Jaskarn on 01604 211234 or by e-mail on jaskarn@investorprofile.co.uk