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How can investors invest in mutual funds?


Direct channel:
• No investment adviser involved
• Typically no loads, 12b-1 fee usually small
• Types of distribution: Fund companies, fund supermarkets, and discount brokers

Indirect channel:
•Investment professional involved
• Professional receives payments from the investment management company
• Additionally, there can be revenue sharing -> conflict of interest
• Types of intermediaries: Full-service brokers, registered investment advisers and bank and saving institution representatives


Direct distribution channels

  • “no lead fund” marketing
  • Lower annual fees -> higher performance -> more attractive for investors
  • investors are required to have some level of financial literacy

Indirect distribution channels

  • No marketing required by the investment management company
  • Access to a large distribution network
  • Loads, 12b-1 fees, and revenue sharing provide strong selling incentives
  • More stable flows
  • Loads do not harm reported fund performance

Bergstresser et al: What is the value of being advised by an investment professional? Does the advice justify the huge amount of fees?

  • Direct funds have significantly lower expenses
  • Author uses the funds net return and adds 12b-1 fee.
  • Do investment professionals recommend better funds ignoring the costs investors have to pay for getting the investment advice?
  • Author also adjusts the returns for risk
  • Result: Investment advisors sell funds that perform worse than the funds investors select on their own
  • Conclusion: Either investment professionals do a poor job or they provide benefits that are not shown in the table
  • Interpretation: Brokers have a conflict of interests and out their interest ahead of their client’s interests.