Demand for Financial Advice, Broker Incentives, and Mutual Fund Market Segmentation
45 Pages Posted: 18 Mar 2009 Last revised: 28 Sep 2011
Date Written: March 4, 2010
Assuming that some investors value both financial advice and performance, but that the brokers needed to provide this advice are unwilling to recommend funds available at lower cost elsewhere, we predict that the market for mutual funds will be segmented. Segmentation forces fund families to target either performance-sensitive investors or investors who value financial advice. Families targeting performance-sensitive investors have the greatest incentive to invest in skilled portfolio management. Combining novel data on mutual fund distribution channels and on subadvisory fees paid for portfolio management, we find strong support for our assumptions regarding investor preferences and our predictions regarding channel segmentation and fund family behavior. Our findings shed new light on the expected relation between mutual fund fees and returns in a competitive market.
Keywords: mutual funds, competition, distribution channel, broker incentives, market segmentation, subadvisory contract, returns, active management
JEL Classification: G23, G11
Suggested Citation: Suggested Citation