Retirement Game-Winning Strategy: Advisors Say Index Investing Is the Way to Go

NEW YORK (TheStreet) -- Financial advisors may be sending a mixed message when it comes to active vs. passive investing. When asked what would be the best way for a mid-career person to invest for retirement, most advisors (42%) said index funds. Just 18% believed actively managed mutual funds were the way to go, according to a recent Bloomberg Markets survey of advisors and money managers.

But are these the recommendations you’re hearing from your financial advisor? Perhaps not, according to the results of another study.

"More than half of advisors have not shifted their relative mix of actively managed and passively managed solutions in the past year," says research issued by Practical Perspectives, an independent consulting and research firm. The report reveals that while advisors are embracing low-cost passive investing, active management remains a major component of the investment solutions offered to clients. In fact, 80% of the advisors surveyed by the firm admitted "significant or moderate" use of active management investments, particularly actively managed mutual funds.

"Advisors still perceive active management as the preferred option in several equity and fixed income asset classes including specialty equities, international, emerging markets, small cap, high yield and strategic income," the report adds.

But this "tactical" use of active management in what are believed to be markets with "alpha" opportunity doesn’t hold up, according to research conducted by S&P Dow Jones Indices. The S&P Indices vs. Active (SPIVA) analysis compares S&P benchmarks to corresponding actively managed mutual funds.

"It is commonly believed that active management works best in inefficient environments, such as small-cap or emerging markets," writes Aye M. Soe, senior director of research at S&P Dow Jones Indices, in a research note. "This argument is disputed by the findings of [the latest] SPIVA Scorecard. The majority of small-cap active managers have been consistently underperforming the benchmark over the full 10-year period as well as each rolling 5-year period, with data starting in 2002."

And while the S&P 500 (SPY) saw double-digit returns for its third year in a row in 2014, the vast majority of large-cap fund managers underperformed the benchmark over short-term and long-term periods. As of Dec. 31, 2014, 86.44% of large-cap fund managers underperformed the benchmark over a one-year period. And over 5- and 10-year periods, 88.65% and 82.07% of large-cap managers failed to deliver incremental outperformance.

"Interestingly, the lowest percentage of outperformance by active managers has tended to occur in the best-performing asset classes," Soe adds. "Among the nine U.S. style categories, mid-cap growth was the best-performing asset class over the past 10 years, with the S&P MidCap 400 Growth returning 10.03%. However, it is also the category where the highest percentages of managers (91.81%) have underperformed."

And in 2014, the majority of the active managers investing in international, international small-cap and emerging markets equities fared worse than their benchmark indices, according to the S&P Indices report.

More from Personal Finance

Are Starter Homes Still Worth It?

Are Starter Homes Still Worth It?

How to Wire Money Safely, Affordably and Quickly

How to Wire Money Safely, Affordably and Quickly

Should You Take a Mini-Retirement?

Should You Take a Mini-Retirement?

The Most Expensive Places for Families to live in the U.S.

The Most Expensive Places for Families to live in the U.S.

Best Ways to Save for Retirement - Even When You're Living Paycheck to Paycheck

Best Ways to Save for Retirement - Even When You're Living Paycheck to Paycheck