These are big claims against a business withever-growing cloutover the billions gushing in and out of ETFs every day. Model portfolio assets have more than doubled over the last five years and Broadridge Financial Solutions projects they can double again to $10 trillion by 2025.
Many providers of models are asset managers, who stand to benefit from new cash flowing to their funds. Meanwhile, financial advisers have embraced them as a way to outsource allocation decisions so more time can be spent attracting and serving clients.
Yet investors are hardly innocent victims. Many appear to be blindly following model recommendations and taking little notice of the fees and performance, the paper said.
Investors who chase the recommendations also behave differently, as they pay less attention to both the price and the performance of the ETFs, the study found.
Brogaard at the University of Utah, Gerasimova at the Norwegian School of Economics and Liu at the Shanghai University of Finance and Economics tracked the effects of model changes in Morningstar data between 2010 and 2020.
They found that an ETF receives 1.1 percentage point more in flows per month after a recommendation, or inclusion in a model. Demand for the featured products also then becomes less sensitive to fees and past performance.
ETFs owned by the same parent company are a little more than three times more likely to be added to a model despite fees that are on average six basis points higher and year-to-date returns 67 basis points lower compared to unaffiliated funds.
[More: Vanguard, American Funds double down on model portfolio partnership]
The findings are the latest iteration of longstanding worries that major Wall Street firms tend to use one business line to boost another, regardless of cost to the end investor. Previous studies have found thatinvesting platformsandretirement-plan providers, for instance, favor funds of the same brand.
Anecdotal evidence has been growing for some time about the impact of model portfolios. A number of outsize ETF flows in recent years have been connected to adjustments in large models.
For example, a tweak to one strategy by BlackRock Inc. in Julydrewa record daily inflow to its ETF of inflation-hedged bonds. The worlds largest asset manager has alsoaddedits main ESG fund to its model portfolios, helping fuel $18 billion of inflows in two years.
The paper, titled Advising the Advisors: Evidence from ETFs, is among the first to document the sway of these portfolios.
Despite the increasing number of model recommendations, little is known about how they influence the investment choices of financial advisors, the academics wrote. We aim to add to the industry and regulatory debate about the opacity of the model portfolios.
[More: Advisers may be struggling to adopt model portfolios]
The post Boom in model portfolios slammed in new paper appeared first on InvestmentNews.
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