Why Does Mutual Fund Advertising Work? Some Complementary Evidence
Posted: 21 May 2019
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Why Does Mutual Fund Advertising Work? Some Complementary Evidence
Why Does Mutual Fund Advertising Work? Some Complementary Evidence
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: Suggested Citation
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