February 18, 2013
Study Shows That Fees to Brokers Do Affect Performance
There is a debate as to whether brokers are self-interested, putting clients into funds that will offer the biggest kickbacks, or whether brokers are more highly regulated than independent advisors and take the needs of their clients seriously. This debate funnels into the question of whether there should be a universal standard for all investment professionals to adhere to.
The Journal of Finance conducted a study that shoes how brokers get paid affects fund flows and performance. Brokers are paid three ways: (1) funds that charge an upfront sales load give 75%-80% of it to the broker; (2) the ongoing 12b-1 fee, which is capped at 1% and always taken out of fund assets, also goes to the broker; (3) revenue-sharing agreements in which the funds management agrees to share with the broker a portion of the management fees it assesses.
The study distinguished between captive brokers and independent brokers and looked at total loads paid as well as the portion of loads that went to the brokers. The study found that these payments skew all broker's incentives, but especially skew independent broker's incentives.
Many brokers disclose their revenue-sharing agreements on their websites, but many people do not look for such disclosures. The majority of the public does not understand or care to reflect on the difference between a broker's advice and an advisor's advice. Some argue that investor education may be a better answer than more regulation.
See Beverly Goodman, Yes, Fees to Brokers Do Affect Performance, Barrons, Feb. 2, 2013.
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