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Conflicts of Interest in Mutual Fund Sales: What Do the Data Tell Us?

Jasmin Sethi, Jake Spiegel and Aron Szapiro
The Journal of Retirement Winter 2019, 6 (3) 46-59; DOI: https://doi.org/10.3905/jor.2019.1.044
Jasmin Sethi
is an associate director of policy research at Morningstar, Inc., in Washington, DC
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Jake Spiegel
is a senior research analyst at Morningstar, Inc., in Washington, DC
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Aron Szapiro
is the director of policy research at Morningstar, Inc., in Washington, DC
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Abstract

Conflicts of interest can arise when financial advisors and brokers have a financial incentive to recommend certain products to investors. Identifying the effects and quantifying the costs of conflicted advice is a challenge for researchers and regulators alike. In this article, the authors build on the methodology developed by Susan Christofferson, Richard Evans, and David Musto and employed by the US Department of Labor (DOL) in its regulatory impact analysis of the fiduciary rule, a package of rules finalized in 2016 that has since been vacated in a court challenge. The authors examine data from public filings and Morningstar to quantify how payments to brokers drive fund flows and affect investor returns and to determine the extent to which regulation has been effective in mitigating conflicts of interest.

Earlier research found that funds that paid higher-than-expected loads to brokers reduced investors’ returns, but the authors’ research finds that after the passage of Dodd–Frank, this relationship weakened, and advisors and brokers are more rigorously screening the products they recommend to investors. Funds that pay higher-than-expected loads to brokers continued to see higher inflows, but this effect diminished around the time the DOL proposed the fiduciary rule, likely because firms took additional steps to facilitate recommendations of lower-cost funds (generally without loads) to retail retirement savers in anticipation and as a result of the rule. The authors interpret this evidence to suggest that the passage of Dodd–Frank and the proposal of the fiduciary rule prompted changes that mitigated the distortionary effects of conflicted advice. They conclude that targeted regulation of financial advice has benefited investors, even if it has not been fully implemented.

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The Journal of Retirement: 6 (3)
The Journal of Retirement
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Winter 2019
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Conflicts of Interest in Mutual Fund Sales: What Do the Data Tell Us?
Jasmin Sethi, Jake Spiegel, Aron Szapiro
The Journal of Retirement Feb 2019, 6 (3) 46-59; DOI: 10.3905/jor.2019.1.044

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Conflicts of Interest in Mutual Fund Sales: What Do the Data Tell Us?
Jasmin Sethi, Jake Spiegel, Aron Szapiro
The Journal of Retirement Feb 2019, 6 (3) 46-59; DOI: 10.3905/jor.2019.1.044
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  • Article
    • Abstract
    • SUMMARY OF THE LITERATURE
    • HOW DOES LOAD SHARING AFFECT FLOWS?
    • WHAT IS THE EFFECT OF EXCESS LOADS ON RETURNS?
    • REASONS FOR DECLINES IN THE IMPORTANCE OF LOAD SHARING
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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