Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry
Harvard Business School
University of Oregon
University of Oxford - Said Business School; National Bureau of Economic Research (NBER); University of Oxford - Said Business School
October 1, 2007
AFA 2006 Boston Meetings
HBS Finance Working Paper No. 616981
Many investors purchase mutual funds through intermediated channels, paying brokers or financial advisors for fund selection and advice. This paper attempts to quantify the benefits that investors enjoy in exchange for the costs of these services. We study broker-sold and direct-sold funds from 1996 to 2004, and fail to find that brokers deliver substantial tangible benefits. Relative to direct-sold funds, broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs. These results hold across fund objectives, with the exception of foreign equity funds. Further, broker-sold funds exhibit no more skill at aggregate-level asset allocation than do funds sold through the direct channel. Our results are consistent either with substantial non-tangible benefits delivered by the broker-distributed sector or with conflicts of interest between brokers and their clients.
Number of Pages in PDF File: 36
Keywords: mutual funds, distribution channels
Date posted: November 8, 2005
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