Broker Incentives and Mutual Fund Market Segmentation

Diane Del Guercio, Jonathan Reuter and Paula Tkac

No 16312, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the impact of investor heterogeneity on mutual fund market segmentation. To motivate our empirical analysis, we make two assumptions. First, some investors inherently value broker services. Second, because brokers are only compensated when they sell mutual funds, they have little incentive to recommend funds available at lower cost elsewhere. The need for mutual fund families to internalize broker incentives leads us to predict that the market for mutual funds will be highly segmented, with families targeting either do-it-yourself investors or investors who value broker services, but not both. Using novel distribution channel data, we find strong empirical support for this prediction; only 3.3% of families serve both market segments. We also predict and find strong evidence that mutual funds targeting performance-sensitive, do-it-yourself investors will invest more in portfolio management. Our findings have important implications for the expected relation between mutual fund fees and returns, tests of fund manager ability, and the puzzle of active management. Furthermore, they suggest that changing the way investors compensate brokers will change the nature of competition in the mutual fund industry.

JEL-codes: G14 G2 G23 L1 (search for similar items in EconPapers)
Date: 2010-08
Note: AP IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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