Demand for Financial Advice, Broker Incentives, and Mutual Fund Market Segmentation

45 Pages Posted: 18 Mar 2009 Last revised: 28 Sep 2011

See all articles by Diane Del Guercio

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Jonathan Reuter

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Paula A. Tkac

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: March 4, 2010

Abstract

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

Del Guercio, Diane and Reuter, Jonathan and Tkac, Paula A., Demand for Financial Advice, Broker Incentives, and Mutual Fund Market Segmentation (March 4, 2010). Available at SSRN: https://ssrn.com/abstract=1361710 or http://dx.doi.org/10.2139/ssrn.1361710

Diane Del Guercio (Contact Author)

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Jonathan Reuter

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paula A. Tkac

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8813 (Phone)
404-498-8810 (Fax)

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