Why Can’t Investors Pick the Right Index Fund?
42 Pages Posted: 14 Dec 2021
Date Written: November 1, 2020
Investors leave large amounts of money on the table when investing in index funds, a popular investment product that accounts for 40% of equity funds. I show that even though high fees strongly predict poor performance, investors have little sensitivity to fees. This can be explained by fund intermediation in the retail sector and the legal standard of care that intermediaries have towards their clients. Net inﬂows to high-fee funds are higher when brokers and ﬁnancial advisors receive sales commissions from the investment management company. When funds are sold through intermediaries held to higher standard of care, such as those sold to employer sponsored deﬁned contribution pension plans, this is no longer the case. Together, this evidence suggests imposing ﬁduciary duties on fund intermediaries improves investor welfare.
Keywords: Index Funds, Mutual Funds
JEL Classification: G23
Suggested Citation: Suggested Citation