'Whom Do You Trust?' Investor-Advisor Relationships and Mutual Fund Flows

58 Pages Posted: 2 Feb 2014

See all articles by Leonard Kostovetsky

Leonard Kostovetsky

Zicklin School of Business, Baruch College

Date Written: March 31, 2013

Abstract

I measure the value that investors place on trust and relationships in asset management by examining mutual fund flows around announced changes in the ownership of fund management companies. I find a decline in flows of around 7% of fund assets in the year following the announcement date, starting after announcement and accelerating after the closing date of the ownership change. A decomposition into inflows and outflows shows that the overall decrease in flows is entirely driven by increasing outflows with no change in inflows. Retail investors and investors in funds with higher expense ratios are most responsive to ownership changes, providing new evidence that such investors place a significant value on trust and are more likely to respond to a relationship disruption by withdrawing their assets. Alternative explanations such as changes in distribution network, reactions to expected fund closure, expected or past manager changes, or poor expected returns do not seem to explain the results.

Keywords: trust, mutual fund flows

JEL Classification: G12, G23

Suggested Citation

Kostovetsky, Leonard, 'Whom Do You Trust?' Investor-Advisor Relationships and Mutual Fund Flows (March 31, 2013). Simon Business School Working Paper No. FR 14-02, Available at SSRN: https://ssrn.com/abstract=2388955 or http://dx.doi.org/10.2139/ssrn.2388955

Leonard Kostovetsky (Contact Author)

Zicklin School of Business, Baruch College ( email )

One Bernard Baruch Way
New York, NY 10010
United States

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