One might argue that advisors are more sophisticated in the way they are thinking about and evaluating the performance of funds. I'm not sure if that's necessarily true. I think the new wrinkle, if we compare it with the last generation or 30 to 40 years ago, is that advisors are adopting a philosophy about the way they think assets should be managed, as opposed to playing tic-tac-toe with the Morningstar style box. An obvious example is the debate between passive and active management; another is the new popularity of liquid alternatives.

The current focus is on providing greater value to clients, which can mean that the advisor is doing more for less compensation. Sometimes, the advisor’s attention shifts to lowering the cost of portfolio management by using less expensive investment vehicles. The advisor may also decide to pay a little extra but add scale by outsourcing portfolio management. At this point, the advisor must take a careful look at his or her fundamental investment philosophy.

At my strategy consulting firm, whenever we talk to RIA firms interested in engaging our services, we ask some important questions:

• What kind of firm are you?
• Are you passive investors?
• Do you believe in outsourcing passive indexing as a fulfillment strategy for your portfolio models?
• Do you believe in a more active approach?
• Do you use a blend of active and passive, such as smart beta?
• Are you using any downside protection?
• Are you trying to lower the total cost of ownership for your client?
• Are you chasing alpha?
• Do you pay attention to beta?

But these are details. There are several fundamental questions here: What do you believe in as an asset manager? What’s the value proposition for your client? How do you manage your firm to ensure that you deliver on that value proposition? Most important, are your clients clear about the value you add to help them achieve their financial goals?

For some advisors, the answers are crystal clear. “We are firm believers in diversification and asset allocation and use only _________.” Fill in the blank: “Dimensional Funds,” “Vanguard,” “ETFs,” etc. Other advisors are focused on simplifying their process -- and their lives. They may be thinking, “Do I really need access to 50 different fund families to deliver value for my client? Or do I need BlackRock, period, end of story?”

For those committed to a passive index approach, the focus is often on finding the most cost-effective way to deliver that for your client. It’s less about analyzing performance against a handful of funds than it is about determining if your selected funds are executing well. Are they sampling their selected index or buying the entire thing? How well does their sample track the strategy? Is there any drift? What is their cost structure and how does it compare to the lowest cost provider? Is the asset allocation right or does it need tweaking?

Many advisors still build their business around an active investment philosophy. In some cases, they have created an in-house investment committee that does its own research and investment selection. In others, they have made careful selections of asset managers who can implement the various components of their investment philosophy. For those who have not shown clients a value proposition beyond investment performance alone, the pressure is on to produce -- either market-beating returns, which are nearly impossible to deliver over the long term with the added costs of active management, or consistent returns despite the market’s ups and downs. Today, more and more investors are coming to realize that the ability to beat the market regularly or generate consistent returns is as likely as seeing a unicorn. If such results are not impossible, they are impossibly rare. Common to multiple “styles” is their increased use of downside protection strategies.

Investment style is the new wrinkle in determining the right asset management model for your firm. Since people haven’t been using indexes or ETFs in large numbers for very long, there are few studies to verify that one philosophy outperforms another reliably. Instinctively, many advisors turn to low-cost products so there will be less drag on performance. But not all indexes or ETFs are inexpensive. It remains to be seen if there’s a “right style” -- but in the meantime, each wrinkle goes in and out of fashion with the market’s moves.

The fastest-growing advisory firms share a number of common characteristics, not including one dominant investment style preference. The high-achieving firms (measured by growth) certainly include investment performance as a part of the overall value proposition, but importantly deliver a more comprehensive wealth management experience for their clients so that the pressure to “outperform” is not the ultimate measure of success.