Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses

47 Pages Posted: 24 Jul 2015

See all articles by Natalie Oh

Natalie Oh

University of New South Wales (UNSW); Financial Research Network (FIRN)

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance; UNSW Business School; Financial Research Network (FIRN)

Eric K. M. Tan

University of Queensland - Business School

Date Written: July 20, 2015

Abstract

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

Oh, Natalie and Parwada, Jerry T. and Tan, Eric K. M., Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses (July 20, 2015). FIRN Research Paper No. 2633816. Available at SSRN: https://ssrn.com/abstract=2633816 or http://dx.doi.org/10.2139/ssrn.2633816

Natalie Oh

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Eric K. M. Tan (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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