Lecture 4

Question 1

How can investors invest in mutual funds?

Answer 1

Direct channel:
• No investment adviser involved
• Typically no loads, 12b-1 fee usually small
• Types of distribution: Fund companies, fund supermarkets, and discount brokers

Indirect channel:
•Investment professional involved
• Professional receives payments from the investment management company
• Additionally, there can be revenue sharing -> conflict of interest
• Types of intermediaries: Full-service brokers, registered investment advisers and bank and saving institution representatives

Question 2

Direct distribution channels

Answer 2

• “no lead fund” marketing
• Lower annual fees -> higher performance -> more attractive for investors
• investors are required to have some level of financial literacy

Question 3

Indirect distribution channels

Answer 3

• No marketing required by the investment management company
• Access to a large distribution network
• Loads, 12b-1 fees, and revenue sharing provide strong selling incentives
• More stable flows
• Loads do not harm reported fund performance

Question 4

Bergstresser et al: What is the value of being advised by an investment professional? Does the advice justify the huge amount of fees?

Answer 4

• Direct funds have significantly lower expenses
• Author uses the funds net return and adds 12b-1 fee.
• Do investment professionals recommend better funds ignoring the costs investors have to pay for getting the investment advice?
• Author also adjusts the returns for risk
• Result: Investment advisors sell funds that perform worse than the funds investors select on their own
• Conclusion: Either investment professionals do a poor job or they provide benefits that are not shown in the table
• Interpretation: Brokers have a conflict of interests and out their interest ahead of their client’s interests.