Series: Working Papers. 2518.
Author: Ricardo Barahona
Business investment
- Quantitative methods
- Non-financial corporations, businesses
- Financial markets
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Abstract
In the United States, investors leave large amounts of money on the table when investing in index 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.