The Securities and Exchange Commission is looking into the sale of model portfolios comprised of exchange-traded funds that are being sold by financial advisers, InvestmentNews reported. A spokesman for the SEC said the agency is examining the practice, according the article.
ETFs are hot. According to Morningstar, the U.S. ETF industry had $785 billion in assets at the end of 2009, up from $533 billion at the end of 2008.
Model ETF portfolios are the next big thing according to some. They are managed portfolios of exchange-traded funds. Investment Advisers who use ETFs for client portfolios often outsource ETF selection to third-party sub-advisers. When that happens, both the primary adviser and the sub-adviser are paid a fee.
According to the article, the main concern is that the sub-advisers are not sophisticated enough to perform proper due diligence on the ETFs and investors could get hurt.
“Everyone and their brother have a model portfolio, and of course every model portfolio has outperformed the market, which is complete nonsense,” said one adviser. “The trouble is there is no verification of most of these models because they didn’t exist two years ago. There is no history.”
Morningstar analysts were concerned enough to approach the SEC about it. The SEC reportedly declined to comment beyond saying that they are looking into the matter.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in ETF cases. For further information, please contact us.