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Advisors adhering to the fiduciary standard typically gravitate toward index funds or other passive strategies such as those developed by Dimensional Fund Advisors, Vanguard and others.

There's a good reason for that. As fiduciaries, these advisors put client interests ahead of their own. Among other things, that means not taking commissions to sell investment products.

However, a fiduciary isn't required to use only passively managed or index funds. In fact, there are situations where actively managed funds make sense in a client portfolio or may be the best alternative, given the circumstances.

"As a fiduciary, one of the reasons for combining active and passive management is we are obligated to bring all options to clients and recommend strategies that are most appropriate for their situation," says Faron Daugs, founder and CEO of Harrison Wallace in Libertyville, Illinois, who uses both active and passive strategies in client portfolios.

This combination introduces distinct investing disciplines, which Daugs says can help mitigate risk. "From a fee or a cost perspective, passive management is generally less expensive than active. We can keep the fee structure down by incorporating both types of strategies, yet providing the exposure to the market that the client needs," he says.

Daugs also notes the potential benefits of active management for capital gains tax-loss harvesting, the process of recognizing losses in a taxable account. These can be offset against gains to minimize the tax owed.

"By keeping the passive management assets invested and utilizing the more active individual stock portfolios, you are able to pick and choose which stocks to sell to lock in gains and offset those with losses that may be in the active management portfolio," he says.

Minimizing Capital Gains Taxes

Capital gains concerns loom large in taxable accounts. It's not uncommon for an advisor to bring on new clients who have held equities for years in taxable accounts. These holdings can have enormous capital gains, meaning a sale could result in a big tax bill.

When an advisor uses active management, it must be balanced with tax efficiency, says James Demmert, founder and managing partner of Main Street Research Wealth Management in Sausalito, California.

"Most clients have significant nontaxable assets, such as an (individual retirement account), as well as taxable accounts such as a trust," he says. "As an active manager, we leverage the IRAs to do most of the selling if possible, thereby mitigating capital gains taxes."

In addition to using individual stocks and bonds, Demmert's firm uses a three-pronged approach called active risk management.

This approach, he says, "incorporates the flexibility of reducing overall equity exposure, staying in healthy sectors and the use of carefully placed stop-loss orders."