Fee Waivers in Money Market Mutual Funds

Abstract

It is a widespread practice among mutual fund managers to voluntarily waive fees that they have a contractual right to claim. This fact is puzzling and changes how contractual fees should be interpreted by investors, regulators, and academic researchers. Notably, the effective fee charged may be substantially less than indicated in expense ratios and may vary over the year despite a constant contractual fee. This study argues that fund managers use fee waivers instead of a flat contracted fee because waivers provide flexibility. Flexible fees are desirable since managers can strategically adjust net advisory fees to current realization in performance as a means of attracting investors. However, it is costly for managers to attain full flexibility in fees. Estimation results suggest that investors react negatively to waivers in comparison with lower fixed net advisory fees.

JEL Classification: G30