No big surprise here, but a new paper supports the view that mutual funds offered through brokers tend to be more expensive and have lower returns than directly placed funds.
Writing in the Review of Financial Studies, the paper’s authors, “find it difficult to identify the tangible benefits delivered by brokers.”
- While brokerage customers are directed toward funds that are harder to find and evaluate, they pay substantially higher fees and the funds they buy have lower risk-adjusted returns than directly placed funds.
- Brokered funds exhibit no better skill at asset allocation. Furthermore, funds sold through brokers demonstrate more performance sensitivity than funds sold through the direct channel.
While the costs of brokers’ services are relatively clear, their benefits are not easily captured by the tangible measures explored in this paper.
Many investors purchase their mutual funds through intermediated channels, engaging and paying brokers or financial advisors for fund selection and advice. The paper analyzes five possible benefits to consumers of brokered fund distribution: (1) assistance selecting funds that are harder to find or harder to evaluate, (2) access to funds with lower costs excluding distribution costs, (3) access to higher performing funds, (4) superior asset allocation, and (5) attenuation of behavioral investor biases.