(Press-News.org) Toronto – Brokers are supposed to recommend investments that are in the best interests of their clients.
But a study published in the February 2013 issue of the Journal of Finance has found that mutual funds offering higher broker fees attract the most investments, especially when the broker is not affiliated with the mutual fund company. Every additional dollar paid to a broker corresponds with another six dollars invested into the fund, and another fourteen dollars if the broker is an unaffiliated third party whose compensation depends exclusively on sales commissions.
It also found these payments are linked to lower investment performance, especially when the fees come from one-time sales loads rather than ongoing payments.
It is the first such study to explicitly show how broker fees affect Investments Into funds and how they subsequently perform.
The freedom mutual fund companies have to decide how to compensate brokers has "real consequences" for the brokers' clients, the paper says. The implication, it adds, is there's a strong case for clearly showing customers how much their broker receives from their investment recommendations.
Brokers are typically compensated in two ways. If the fund is a front-end load, the investor pays a one-time charge, taken immediately off the top of their initial investment as a predetermined percentage. The broker receives the bulk of that charge.
"For the most part, investors are completely unaware," how much of the load goes to their broker, says Susan Christoffersen, a professor of finance at the University of Toronto's Rotman School of Management, who co-wrote the study with Richard Evans of the University of Virginia, and the University of Pennsylvania's David Musto. "If it's revealed, it would be in the statement of additional information or the details of a prospectus."
Investors may also not realize how much their brokers continue to receive out of their investments, via ongoing "trailer fees." These fees vary but in Canada make up about 40% of the management expense ratio, or MER.
The study looked at data on the performance and asset flows of U.S. mutual funds between 1993 and 2009 and related these with the fees paid to brokers disclosed in N-SAR filings to the U.S. Securities and Exchange Commission. The requirement for these filings arose directly out of regulators' concerns of conflicts of interest and the effect of broker fees on the growth and size of mutual funds.
###
Read the entire study online at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1393289.
For the latest thinking on business, management and economics from the Rotman School of Management, visit www.rotman.utoronto.ca/FacultyAndResearch/NewThinking.aspx.
The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world's most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. The School is currently raising $200 million to ensure Canada has the world-class business school it deserves. For more information, visit www.rotman.utoronto.ca.
-30-
For more information:
Ken McGuffin
Manager, Media Relations
Rotman School of Management
University of Toronto
Voice 416-946-3818
E-mail mcguffin@rotman.utoronto.ca
Follow Rotman on Twitter @rotmanschool
Watch Rotman on You Tube www.youtube.com/rotmanschool END
Broker fees from mutual funds affect advice; predict worse performance, new study says
2013-01-30
ELSE PRESS RELEASES FROM THIS DATE:
New target to stop cancer's spread discovered by Georgia State scientists
2013-01-30
Disrupting a key interaction between two types of proteins in cells inhibits the spread of cancerous cells, providing researchers with a new pathway toward developing cancer-fighting drugs, according to new findings by Georgia State University scientists.
Cell migration is essential for the spread of cancerous cells, also known as metastasis, as well as for other diseases. The research team in the labs of Zhi-Ren Liu, professor of biology, and Jenny Yang, professor of biochemistry, studied the interaction of two molecules, p68 RNA helicase and calcium-calmodulin.
Interrupting ...
NTU research embraces laser and sparks cool affair
2013-01-30
Bulky and noisy air-conditioning compressors and refrigerators may soon be a thing of the past.
With the latest discovery by scientists from Nanyang Technological University (NTU), current cooling systems which uses refrigerant harmful to the ozone layer could be replaced by a revolutionary cooling system using lasers.
This discovery, published and featured on the cover of the 24 January 2013 issue of Nature, the world's top scientific journal, could also potentially lead to a host of other innovations. This includes making huge Magnetic Resonance Imaging (MRI) machines, ...
Study finds little progress in participation of early-career RNs in hospital QI
2013-01-30
Nurses are the largest group of health care providers in the U.S., and health care leaders and experts agree that engaging registered nurses (RNs) in quality improvement (QI) efforts is essential to improving our health care system, patient care and our nation's health. Unfortunately, despite studies demonstrating the value of nurse-led quality improvement efforts, far too few nurses are involved in these efforts, and the number is not growing, according to a study published in the Journal of Nursing Care Quality.
The study—part of the RN Work Project funded by the Robert ...
Campus as laboratory: U-M student biologists use Diag trees to help solve gypsy moth mystery
2013-01-30
ANN ARBOR—Working beneath the towering oaks and maples on the University of Michigan's central campus Diag, undergraduate researchers and their faculty adviser helped explain an observation that had puzzled insect ecologists who study voracious leaf-munching gypsy moth caterpillars.
The caterpillars, which defoliate and sometimes kill stands of trees in the Upper Midwest and the Northeast, are especially fond of oaks, but sugar maple trees appear to be relatively resistant to the European pest.
Biologists wondered whether the caterpillars shun sugar maples in part because ...
5-year follow-up - over half of all ACL reconstructions could be avoided
2013-01-30
"We have continued with our study and for the first time are able to present a five-year follow-up on the need for and results of ACL surgery as compared with physiotherapy. The findings have been published in the British Medical Journal and are basically unchanged from 2010. This will no doubt surprise many people, as we have not seen any difference in the incidence of osteoarthritis", says Richard Frobell, one of the researchers behind the study, who is an associate professor at Lund University and a clinician at the orthopaedic department, Helsingborg Hospital.
Richard ...
New drug target identified for multiple sclerosis and Alzheimer's disease
2013-01-30
(Boston)–Researchers at Boston University School of Medicine (BUSM) led by Carmela Abraham, PhD, professor of biochemistry, along with Cidi Chen, PhD, and other collaborators, report that the protein Klotho plays an important role in the health of myelin, the insulating material allowing for the rapid communication between nerve cells. These findings, which appear online in Journal of Neuroscience, may lead to new therapies for multiple sclerosis (MS) and Alzheimer's disease (AD), in which white matter abnormalities are also common but have been largely ignored.
MS is ...
Female deer take control during the mating season
2013-01-30
A new study provides the first evidence of polyandry – when females choose to mate with more than one male – in female fallow deer.
According to a team of scientists from Queen Mary, University of London, UWEHartpury, and University College Dublin, female fallow deer play an active role in selecting their mates, with a consistent proportion (on average 12 per cent) choosing to mate with multiple males each year.
"Until now there has been limited understanding of female mate choice during this process, with many people believing that female deer are controlled by males ...
Toward a better cyanide antidote for terrorist attacks and other mass casualty events
2013-01-30
In an advance toward closing a major gap in defenses against terrorist attacks and other mass casualty events, scientists are reporting discovery of a promising substance that could be the basis for development of a better antidote for cyanide poisoning. Their report, which describes a potential antidote that could be self-administered, much like the medication delivered by allergy injection pens, appears in ACS' Journal of Medicinal Chemistry.
Steven E. Patterson, Ph.D., and colleagues at the University of Minnesota Center for Drug Design explain that the only existing ...
Why some immigrants get citizenship
2013-01-30
CAMBRIDGE, MA -- For immigrants, the path to citizenship in many countries is filled with hurdles: finding a job, learning the language, passing exams. But for some people, the biggest obstacle of all may be one they cannot help: their country of origin.
That's one conclusion of a methodologically innovative study of European immigrants suggesting that, other qualifications being equal, migrants from certain countries may be roughly 40 percent less likely than others to gain citizenship.
Even if an immigrant has obtained a good education and job, and solid language ...
First mobile app for green chemistry fosters sustainable manufacturing of medicines
2013-01-30
Mention mobile applications, or mobile apps, and people think of games, email, news, weather, productivity and other software for Apple, Android and other smart phones and tablet computers. But an app with broader impact — the first mobile application to foster wider use of the environmentally friendly and sustainable principles of green chemistry — is the topic of a report in the American Chemical Society's new journal, ACS Sustainable Chemistry & Engineering.
Sean Ekins, Alex M. Clark and Antony Williams point out that the companies that manufacture medicines, electronics ...