Fees, Flexibility and Focus: Weighing the Costs of Active vs Passive

The debate between active and passive investing has been ongoing for decades. On the one hand, passive investing offers simplicity, lower costs, and—statistically speaking—better results for many investors. On the other, active fund managers argue they offer diversification, flexibility, and the potential to outperform.

But in truth, the question shouldn’t be “Which is better?” It should be, “What’s right for this client, in this market, given their objectives?”

As the FCA rightly points out, the focus should always be on client outcomes. In this blog, we explore the active vs passive debate through three key lenses: Fees, Flexibility, and Focus.

Fees: Is Cheaper Always Better?

It’s easy to assume that lower fees equal better value. After all, cost is a tangible number—value is not.

Passive strategies, especially index funds and ETFs, are known for their low costs. Campaigns often highlight how lower fees can significantly boost long-term returns. And studies like the S&P Dow Jones SPIVA Scorecard consistently show that the majority of active managers underperform their benchmarks over time, particularly in efficient markets like the US.

But here’s the catch: all performance is reported after fees. A well-selected active manager who charges more but consistently adds alpha can still leave an investor better off.

Example: A 30-year-old invests £10,000 for 30 years with a 5% net return. This grows to £43,219.If an active strategy delivers 7% net, the final value is over £76,122.That’s a £32,903 difference — despite higher fees.

The point? Low fees don’t always equal high value. The real question is: what am I paying for—and am I getting it?

Flexibility: Active vs Passive - Who’s Steering the Ship?

Passive investing is like being on autopilot. You follow the market—wherever it goes. If there's an iceberg ahead, you're staying the course.

That’s fine if you're confident the ship will stay afloat long-term. But active managers can grab the wheel. They can reduce risk, increase cash, avoid distressed sectors, or lean into high-conviction opportunities.

Analogy:

·       A passive fund hits the iceberg and waits for recovery.

·       An active fund tries to steer around it—or avoid that part of the ocean altogether.

Not all passive funds are created equal, of course. Some use enhanced indexing or smart beta strategies, adding a layer of decision-making. These often come with slightly higher costs but may improve risk-return characteristics.

The best active managers use their discretion to avoid problematic sectors and seek new opportunities—especially in less efficient markets like small caps, emerging markets, or high-yield bonds.

Focus: Goals, Outcomes and Behaviour

Investing should always start with the why. Pure passive funds offer broad market exposure and can suit long-term investors who want to keep costs down and avoid making timing errors.

But they lack personalisation. They can’t exclude industries a client may want to avoid (e.g., tobacco, fossil fuels). They can’t lean into specific themes (e.g., renewables, innovation). That’s where active investing can align better with sustainability goals, ethical preferences, and investment narratives.

There’s also a behavioural advantage in working with advisers and using active managers: keeping clients invested. The real destroyer of wealth isn’t fees—it’s panic selling and emotional decisions.

Blending styles—such as a passive global equity core with an active thematic or fixed income sleeve—can help smooth returns, offer diversification across styles, and manage behavioural risks.

 

Conclusion: Choosing with Eyes Wide Open

The debate between active and passive doesn’t need to be a zero-sum game. It’s not about sides—it’s about balance.

At QuantQual, we believe a blend of styles, informed by client objectives and market context, is often the best way to manage risk and support outcomes. By looking through the lenses of fees, flexibility, and focus, financial planners can build strategies that are aligned, adaptive, and evidence based.