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.
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 that investing platforms and retirement-plan providers, for instance, favor funds of the same brand.
Anecdotal evidence has been growing for some time over 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 July drew a record daily inflow to its ETF of inflation-hedged bonds. The world’s largest asset manager has also added its main ESG fund to its model portfolios, helping fuel $18 billion of inflows in two years.
“As a fiduciary, BlackRock provides model portfolios for advisors designed to meet clients’ investment objectives while controlling for risk in an efficient, cost-effective manner,” a spokesperson said by email. “Our platform offers advisors choice from a wide range of portfolio options which may include iShares ETFs, BlackRock mutual funds and ETFs and funds from third party managers.”
The new 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.”
This article was provided by Bloomberg News.