Does Advisor Channel Influence Passive Fund Choice?

Abstract

Historical differences in compensation may influence how representatives from broker-dealers, registered investment advisers, and dual registrants select funds. Evidence from advertising content suggests that active-fund families promote characteristics such as recent returns that are both appealing to investors and reward commission-compensated advisors, but do not predict future performance. Using a survey that asks advisors to list the top three criteria they use when selecting mutual funds for a client and their investment style, we find that registered representatives (from RIAs) favor more salient characteristics such as expense ratio while representatives from broker-dealers and dual registrants favor recent returns and active investing strategies. Registered representatives from RIAs are more likely to follow a passive investing strategy and consider expense ratio as an important fund characteristic, while there is no statistical difference between representatives from broker-dealers and dual registrants. These findings are consistent with the existence of conflicts that favor the promotion of active investing strategies among advisors who are regulated as fiduciaries.

Keywords: Investment advisors, brokers, mutual funds, active management, fiduciary

JEL Classification: D14, G11, G18, G24, G28