Featured Research

from universities, journals, and other organizations

Broker fees from mutual funds affect advice; predict worse performance, new study says

Date:
January 30, 2013
Source:
University of Toronto, Rotman School of Management
Summary:
Brokers are supposed to recommend investments that are in the best interests of their clients. But a new study has found that mutual funds offering higher broker fees attract the most investments, especially when the broker is not affiliated with the mutual fund company.

Brokers are supposed to recommend investments that are in the best interests of their clients.

Related Articles


But a study published in the February 2013 issue of the Journal of Finance has found that mutual funds offering higher broker fees attract the most investments, especially when the broker is not affiliated with the mutual fund company. Every additional dollar paid to a broker corresponds with another six dollars invested into the fund, and another fourteen dollars if the broker is an unaffiliated third party whose compensation depends exclusively on sales commissions.

It also found these payments are linked to lower investment performance, especially when the fees come from one-time sales loads rather than ongoing payments.

It is the first such study to explicitly show how broker fees affect Investments Into funds and how they subsequently perform.

The freedom mutual fund companies have to decide how to compensate brokers has "real consequences" for the brokers' clients, the paper says. The implication, it adds, is there's a strong case for clearly showing customers how much their broker receives from their investment recommendations.

Brokers are typically compensated in two ways. If the fund is a front-end load, the investor pays a one-time charge, taken immediately off the top of their initial investment as a predetermined percentage. The broker receives the bulk of that charge.

"For the most part, investors are completely unaware," how much of the load goes to their broker, says Susan Christoffersen, a professor of finance at the University of Toronto's Rotman School of Management, who co-wrote the study with Richard Evans of the University of Virginia, and the University of Pennsylvania's David Musto. "If it's revealed, it would be in the statement of additional information or the details of a prospectus."

Investors may also not realize how much their brokers continue to receive out of their investments, via ongoing "trailer fees." These fees vary but in Canada make up about 40% of the management expense ratio, or MER.

The study looked at data on the performance and asset flows of U.S. mutual funds between 1993 and 2009 and related these with the fees paid to brokers disclosed in N-SAR filings to the U.S. Securities and Exchange Commission. The requirement for these filings arose directly out of regulators' concerns of conflicts of interest and the effect of broker fees on the growth and size of mutual funds.


Story Source:

The above story is based on materials provided by University of Toronto, Rotman School of Management. Note: Materials may be edited for content and length.


Journal Reference:

  1. Susan Kerr Christoffersen, Richard B. Evans, David K. Musto. What do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives. Journal of Finance / SSRN Electronic Journal, 2012; DOI: 10.2139/ssrn.1393289

Cite This Page:

University of Toronto, Rotman School of Management. "Broker fees from mutual funds affect advice; predict worse performance, new study says." ScienceDaily. ScienceDaily, 30 January 2013. <www.sciencedaily.com/releases/2013/01/130130101941.htm>.
University of Toronto, Rotman School of Management. (2013, January 30). Broker fees from mutual funds affect advice; predict worse performance, new study says. ScienceDaily. Retrieved October 25, 2014 from www.sciencedaily.com/releases/2013/01/130130101941.htm
University of Toronto, Rotman School of Management. "Broker fees from mutual funds affect advice; predict worse performance, new study says." ScienceDaily. www.sciencedaily.com/releases/2013/01/130130101941.htm (accessed October 25, 2014).

Share This



More Computers & Math News

Saturday, October 25, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Real-Life Transformer Robot Walks, Then Folds Into a Car

Real-Life Transformer Robot Walks, Then Folds Into a Car

Buzz60 (Oct. 24, 2014) — Brave Robotics and Asratec teamed with original Transformers toy company Tomy to create a functional 5-foot-tall humanoid robot that can march and fold itself into a 3-foot-long sports car. Jen Markham has the story. Video provided by Buzz60
Powered by NewsLook.com
Microsoft Riding High On Strong Surface, Cloud Performance

Microsoft Riding High On Strong Surface, Cloud Performance

Newsy (Oct. 24, 2014) — Microsoft's Q3 earnings showed its tablets and cloud services are really hitting their stride. Video provided by Newsy
Powered by NewsLook.com
The Best Apps to Organize Your Life

The Best Apps to Organize Your Life

Buzz60 (Oct. 23, 2014) — Need help organizing your bills, schedules and other things? Ko Im (@konakafe) has the best apps to help you stay on top of it all! Video provided by Buzz60
Powered by NewsLook.com
Nike And Apple Team Up To Create Wearable ... Something

Nike And Apple Team Up To Create Wearable ... Something

Newsy (Oct. 23, 2014) — For those looking for wearable tech that's significantly less nerdy than Google Glass, Nike CEO Mark Parker says don't worry, It's on the way. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
 
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:  

Breaking News:

Strange & Offbeat Stories

 

Space & Time

Matter & Energy

Computers & Math

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:  

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile iPhone Android Web
Follow Facebook Twitter Google+
Subscribe RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins