Financial Advisors: Looking at Active Investing in a New Way


In volatile bear markets, there’s not much glory to be had in sensible index fund investing. No one likes reporting quarterly losses and “stay-the-course” strategies to clients when those same clients are hearing stories of their untrained day trading friends making a killing in the very same market.

Pro investors and clients are also giving more credence to the market’s new normal. Buy-and-hold is a universal principle, but to most people, accessibility equals activity. No one wants to be “Washed Up Warren” selling at the bottom of the airline crash when literally anybody can start a Robinhood account and range trade American Airlines AAL for ultra-quick profits.

To be sure, seasoned investors know that unprofessional active investing turns out bad for most people. Your client’s friends are only reporting the victories to your client, not the losses. Yes, Buffett sold at the bottom of the airlines, but he also made $11 billion in Apple just this year ($47 billion in total). As much sense as the index fund still makes, waiting is still a hard argument to make in the face of FOMO. (You spent years unlearning the fear of missing out; you can’t expect your clients to exorcise it from themselves just because you said so!)

Plus, the client is always right. As a financial advisor, your real job is giving your clients peace of mind with their money. We’re in the Millennial Money generation — the way you make your clients money is just as important as actually making it (hint: impact investing).

We must also take our share of the blame. Passive investing based around index funds looked great over the past 12 years, the longest bull market in history. We are not in that market any more. Proactive investing may be making a comeback for a very good reason — investment strategies must change when the underlying market conditions change.

How Financial Advisors Can Help Investors Who Want to “Do Something Different”

Investment strategies invariably match the lifestyles of the investors, and today’s investment lifestyle is global and diverse. Digital nomads are making good money through virtual offices while traveling the world. Retail traders are moving seamlessly between currencies and cryptocurrencies at will. Savers now have the choice of putting their money directly into foreign banks for higher interest rates without leaving the comfort of home. It makes sense that these investors would want a bit more activity from the financial advisors they choose.


Even those living more traditional lifestyles are using the expanded access they have to the markets. Mobile trading app Robinhood (which always seems to be the metric for Millennial Money talk) grew to more than 10 million accounts by the end of 2019. The app now has around 50% of the merged 24 million Charles Schwab/TD Ameritrade client base in less than 7 years of operation.

“A good advisor will also provide planning, tax and other advice,” says Charles Lewis Sizemore, chief investment officer at Sizemore Capital Management. “They can also provide access to strategies that are a little harder to replicate or that haven't been turned into off-the-shelf commoditized index products.”

To serve this audience is also to help them expand upon their personal knowledge of the market and safely expose them to more exotic investment strategies.

“If a client feels like they have the ‘beta’ component of their portfolio handled, then you can still add value by complementing the core of their portfolio with more aggressive satellite positions or alternative strategies,” says Sizemore. “In my practice, we regularly invest clients in more exotic assets such as put writing strategies, medical accounts receivable and long/short strategies.”

How AI Can Help

Keeping up with a digitally savvy investor means holding an expertise in how artificial intelligence (AI) can help the bottom line. Until someone masters artificial feelings, we can definitely use our robot class to achieve the idyllic emotionless investing we all strive for. A computer’s cold objectivity gives us the opportunity to make better decisions all-around. Plus, we finally don’t have to do all that math.

"We all have ideas about what we could get done, and practices we would put into place — if we had the time," says Yewno CEO Ruggero Gramatica. "AI gives you the opportunity to automate some of the minutiae of collecting and processing information so that you can get to what really matters — testing new strategies, exploring indirect connections within your portfolio or determining exposure to concepts as they develop."

Here are just a few of the ways that AI can help active investment strategies:

  • Financial literacy: AI can serve as an investment conscience, showing an alert when an investor participates in a risky trade or targeted behavior.

  • Financial planning: A computer’s long memory can remind an investor of long term goals and support goal based planning.

  • Managing the mundane: Robotic process automation can ensure error free processes, freeing an investor’s time to strategize higher value investment activities.

  • Client interaction: Virtual assistants and chatbots can handle many customer service calls, freeing an advisor’s time. A surprising percentage of people actually prefer chatting with a robot rather than a human.

  • Continuous analysis: Advanced machine learning algorithms learn in real time how to invest and manage a portfolio based on the standards of the investor.

Keep in mind that AI does not replace human interaction, sophisticated analysis or business intelligence, and it won’t for quite some time, if ever. AI can expand the scope and scale of advisory services and make sure that all strategies are appropriately and thoroughly vetted before execution.

Types of Active Investing Financial Advisors Can Offer

Armed with AI and a new perspective on the modern investor, the savvy advisor will be able to incorporate many new types of active investing into strategies.

Stock Picking

Stock picking in an active investment strategy does not necessarily equate to picking great companies. Short sellers are actively looking for overvalued companies to exploit bloated P/E ratios and faulty forward guidance statements. Once an advisor understands the purpose of a portfolio, he can begin to actively recommend stocks to fit the strategy.

An active stock picking strategy likely involves frequent rebalancing. Advisors can help investors stay appropriately balanced without overtrading.


Another type of active investing involves buying and selling securities and derivatives around a core portfolio. The core portfolio serves as risk protection for the derivative trades. The active trading is usually meant to pursue alpha while the core holdings follow market returns.

Swing Trading

Swing trading is based on mastering stock entry and exit points. Swing traders are more concerned with technical analysis than a company’s fundamentals, and will often make trades into businesses that are objectively struggling — even businesses that are in open bankruptcy.

The volatility of the modern market means that stock prices will deviate from company value more frequently. As buyers and sellers argue over what the correct price is, the swing trader swoops in, uncaring, and skims off the top.

Volatility Investing

For investors who find no luck guessing a stock’s direction, volatility can be another way to profit. Volatility plays are often directionless, involving a purchase on the long and short side of a security.

Volatility investing is best done through options, derivatives that are created specifically to capture and quantify volatility. However, options bring with them a unique set of behaviors and characteristics that the average investor may not understand. The computers will do the math, so you don’t have to teach that — but teaching your investors about the Greeks (all of them, minor Greeks included) is essential.

High-Frequency Trading (HFT)

If your client has a technological advantage and understands the intricacies of making a market, HFT can be a very profitable way to actively invest. Understanding software latency and market inefficiencies are more important here than knowing whether a company will meet its Q2 revenues.

The proliferation of trading technology has given investors outside of the elite hedge fund community an opportunity for HFT. With the right advice about the core of market operations, you could expand these efforts.

Platforms to Guide Financial Advisors

Who’s going to advise the advisor? There are actually many platforms dedicated to supporting you as you support your clients.

In most cases, it's not an advisor’s job to determine an investor’s philosophy. An advisor guides an investor safely to a financial destination while accounting for and using an investor’s philosophy. The advisor, in a way, must be a jack of all trades. It helps to have a bevy of tools to help guide the guide.

“All investing is active,” says Phil Kernen, Mitchcap portfolio manager. “We believe the best investing happens when advisors and their clients acknowledge that investing mandates a cycle of active decisions.”

Market News and Data brought to you by Benzinga APIs
Posted In: Financial AdvisorsPersonal Finance
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!