How can investors invest in mutual funds?
• No investment adviser involved
• Typically no loads, 12b-1 fee usually small
• Types of distribution: Fund companies, fund supermarkets, and discount brokers
•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.