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Why Does Mutual Fund Advertising Work? Some Complementary Evidence

Journal of Index Investing, Vol. 1, No. 1, pp. 55-60, Summer 2010

6 Pages Posted: 3 Jul 2010 Last revised: 6 Mar 2017

John A. Haslem

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2010

Abstract

The basic question that this article addresses is: Why does mutual fund advertising work? The summation of external evidence is compatible with evidence that greater mutual fund advertising attracts investors with below-average financial literacy who find the investment decision process overwhelming:

1. Investor levels of financial literacy predict differences in investment behavior.

2. Investors with below-average financial literacy are overwhelmed by information overload in the investment process and opt out.

3. Investors with below-average financial literacy make non- normative “revealed preference” choices that include passive investment, avoidance of investment complexity, and decisions based on limited experience.

4. Investors with below-average financial literacy are attracted to funds (increased flow) that come to their attention through greater fund advertising.

5. Investors with below-average financial literacy favor broker-sold funds, which underperform direct-sold funds even on a pre-distribution fee basis.

6. Broker-sold funds with larger front-end loads and distribution fees provide agency incentives for brokers to sell higher-cost and lower-performing funds for their own benefit.

7. Funds sold through selected superior financial advisors are to be favored over broker-sold funds due to higher standards of legal performance, higher quality and range of services, lower-cost and higher-performing funds, and “fee only” charges.

Keywords: mutual funds, advertising, financial literacy, information overload, revealed preferences, broker-sold funds, performance, distribution fees, agency, financial advisors, fee-only advisors

JEL Classification: G2, G23, G28

Suggested Citation

Haslem, John A., Why Does Mutual Fund Advertising Work? Some Complementary Evidence (July 1, 2010). Journal of Index Investing, Vol. 1, No. 1, pp. 55-60, Summer 2010. Available at SSRN: https://ssrn.com/abstract=1633596

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
202-387 2025 (Phone)

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