From Implicit to Explicit: The Consequences of Fee Disclosure
41 Pages Posted: 30 Jun 2019
Date Written: May 24, 2019
We investigate whether more salient fee disclosure mitigates bond market professionals' ability to charge retail investors high fees. We explore changes in fees around FINRA's 2018 amendment of the customer confirmation rule, requiring corporate bond market professionals to explicitly disclose the fee (markup) on some retail trades. Investors could have inferred the fee before the rule change using historical transaction prices. Nonetheless, we find that fees associated with trades subject to explicit fee disclosure decline after the rule change, relative to trades that are not subject to explicit fee disclosure. Our findings are pronounced among bonds for which fees were highest before the rule change. In sum, our evidence shows that the nature of fee disclosure (i.e., explicit or implicit) has real effects on corporate bond market professionals' ability to charge high fees for their services.
Keywords: Dealer markets, Disclosure regulation, Processing costs, Investment advisors
JEL Classification: G24, G28, D82, D83
Suggested Citation: Suggested Citation