Why Does Mutual Fund Advertising Work? Some Complementary Evidence

Posted: 21 May 2019

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business; University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2010

Abstract

The basic question is why does mutual fund advertising work? The summation of external evidence is compatible with evidence that larger mutual fund advertising attracts investors with below average financial literacy who find the investment decision process overwhelming:

(1) Investor levels of financial literacy predict differences in investment behavior. (2) Investors with below average financial literacy find investment decisions overwhelming. (3) Investors with below average financial literacy make non-normative "revealed preference" choices that include passive investment, avoidance of investment complexity, and decisions based on limited experience. (4) Investors with below average financial literacy are attracted to funds that come to their attention by larger fund advertising. (5) Investors with below average financial literacy favor broker-sold funds, which underperform direct-sold funds even on a pre-distribution fee basis. (6) Broker-sold funds with larger front-end loads and distribution fees provide conflict of interest incentives for brokers to sell higher cost and lower performing funds for their own benefit. (7) Funds sold through selected superior financial advisors are to be favored over broker-sold funds due to higher standards of legal performance, higher quality and range of services, lower cost and higher performing funds, and "fee only" charges.

Keywords: mutual funds, advertising, below average financial literacy, broker-sold funds, investment behavior, overwhelming investment decisions, revealed preferences, front-end load, distribution fees, conflict of interest, financial advisor, legal standards, performance

JEL Classification: G2, G23, G28

Suggested Citation

Haslem, John A. and Haslem, John A., Why Does Mutual Fund Advertising Work? Some Complementary Evidence (June 1, 2010). https://doi.org/10.3905/jii.2010.1.1.055, Available at SSRN: https://ssrn.com/abstract=1428620 or http://dx.doi.org/10.2139/ssrn.1428620

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

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