Media Releases

Broker fees from mutual funds affect advice; predict worse performance, new study says

January 30, 2013

TORONTO, ON – 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:

For the lat­est think­ing on busi­ness, man­age­ment and eco­nom­ics from the Rot­man School of Man­age­ment, vis­it

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


For more infor­ma­tion:

Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
Voice: 416.946.3818
Fol­low Rot­man on Twit­ter @rotmanschool
Watch Rot­man on You Tube