Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses
Journal of Financial and Quantitative Analysis, Volume 52, Issue 2April 2017 , pp. 781-809
47 Pages Posted: 24 Jul 2015 Last revised: 24 Sep 2019
Date Written: July 20, 2015
Theory predicts that capping brokers’ compensation exacerbates the exploitation of retail investors. We show that regulated caps on mutual fund 12b-1 fees, effectively sales commissions, are associated with negative equity fund performance, but only after a structural shift toward maximum permitted levels of the fees around 2000. Past this break point, flow–performance sensitivity shifts from the middle- to the highest-performing funds, suggesting that the fee cap increases performance-chasing behavior by constraining brokers’ incentives to learn about lower-ranked funds. The policy implication is that regulators must reevaluate the efficacy of caps on brokerage fees.
Keywords: Mutual Funds, Brokerage Fees, Incentives, Performance, Money Flows
JEL Classification: G23, G24, G28
Suggested Citation: Suggested Citation