Do Investment Consultants’ Recommendations Add Value? Nope.

/Do Investment Consultants’ Recommendations Add Value? Nope.

Do Investment Consultants’ Recommendations Add Value? Nope.

By | 2017-08-18T17:06:19+00:00 September 15th, 2016|Research Insights|3 Comments

Just got done perusing the latest issue of the Journal of Finance . As is the typical case, 50% of the articles can be read if you have a PhD in math, but the other 50% are readable. Kinda.

Here is a really surprising one: Investment consultant recommendations are effectively worthless, on average.

Similar to the retail advisory space, the institutional consultant service providers likely add value via their role as a money doctor, not in their role as a “manager picker.”

Picking Winners? Investment Consultants’ Recommendations of Fund Managers

Investment consultants advise institutional investors on their choice of fund manager. Focusing on U.S. actively managed equity funds, we analyze the factors that drive consultants’ recommendations, what impact these recommendations have on flows, and how well the recommended funds perform. We find that investment consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows. However, we find no evidence that these recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.

Here is the key table from the paper highlighting that the spread in performance between recommended and not-recommended funds is flat, and arguably negative if you equal-weight the recommendations.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.


  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
  • Join thousands of other readers and subscribe to our blog.
  • This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.

Print Friendly, PDF & Email

About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

3 Comments

  1. ptuomov September 15, 2016 at 11:00 am

    If the value weighted performance is the same between recommended managers and not recommended managers, yet recommendation leads to large inflows, then that’s interesting in itself.

    On the one hand, the inflows caused by the recommendation may push up the existing holdings of recommended managers in the near term. On the other hand, the resulting higher AUM will make adding the same percentage value added harder and require more skill and dollar alpha.

    Do the subsequent performance measures control for AUM and flows? It would be interesting to see what the performance results are if you match the recommended managers to non-recommended managers that have matching AUM and matching subsequent flow.

    • Wesley Gray, PhD
      Wesley Gray, PhD September 15, 2016 at 11:07 am

      The paper is 50 pages and full of tests (to include regression analysis that tries to control for a bunch of things), and if that doesn’t fulfill your interests I imagine the authors/journal will post that some where in the near future. Typically the referees make the authors post their reams of robustness tests in an appendix.

      • ptuomov September 21, 2016 at 2:24 pm

        I’ve only read the ungated earlier copy. (http://www.umass.edu/preferen/You%20Must%20Read%20This/PickingWinners.pdf).

        Table 7 says that once you control for AUM, the negative return spread to recommended managers minus not recommended managers flips from negative to (statistically insignificant) positive. Regressions labeled 3 and 6.

        If you look at table 4, you’ll see that, relative to their benchmark, all portfolios add value in terms of a simple return spread (column 2). The only group of portfolios that doesn’t add value relative to benchmark after four-factor adjustment is value-weighted portfolio of _not recommended_ managers. Whether or not the recommended managers add less or more percentage points of value added than no recommended managers is somewhat sensitive to weighting. It’s, however, clear to me from that table that the point estimate is that the recommended managers do add value relative to benchmark.

        Together, these tables suggest to me that recommended managers are adding a lot more _dollar_ alpha than not recommended managers. Why is the authors’ (and it seems to be yours as well) conclusion that consultants’ investment recommendations don’t add value, if the managers that they pick have a lot higher dollar alpha? At minimum, this question may provide some food for thought.

Comments are closed.