Fee Awareness and Brokerage Choice

Abstract

Full-service brokers, which hold over ten trillion dollars in retail investor assets, charge relatively high fees. We hypothesize that, due to information-processing constraints, many of these investors are not aware of the relatively high fees and their effects on performance. Our experimental analysis supports this hypothesis. This analysis also suggests many investors would consider switching to a lower-cost broker once they are aware of the fee differential and its effects. Our evidence is consistent with investor inattention as well as the behavioral attenuation hypothesis, in which investors facing information-processing constraints are overly insensitive about differences in fees when choosing a broker.

Keywords: Behavioral Finance, Retail Investors, Brokerages, Investment Costs

JEL Classification: G41, G51