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Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses

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  • Oh, Natalie Y.
  • Parwada, Jerry T.
  • Tan, Eric K. M.

Abstract

Theory predicts that capping brokers’ compensation exacerbates the exploitation of retail investors. We show that regulated caps on mutual fund 12b-1 fees, effectively sales commissions, are associated with negative equity fund performance, but only after a structural shift toward maximum permitted levels of the fees around 2000. Past this break point, flow–performance sensitivity shifts from the middle- to the highest-performing funds, suggesting that the fee cap increases performance-chasing behavior by constraining brokers’ incentives to learn about lower-ranked funds. The policy implication is that regulators must reevaluate the efficacy of caps on brokerage fees.

Suggested Citation

  • Oh, Natalie Y. & Parwada, Jerry T. & Tan, Eric K. M., 2017. "Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 781-809, April.
    • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:02:p:781-809_00
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    Cited by:

    1. Yaping Xiao & Haishu Qiao & Ting Xie, 2019. "Open-End Funds for Sustainable Economic Growth in China: The Relationship between Load Fees, Performance, and Flows," Sustainability, MDPI, vol. 11(22), pages 1-27, November.
    2. Galagedera, Don U.A. & Fukuyama, Hirofumi & Watson, John & Tan, Eric K.M., 2020. "Do mutual fund managers earn their fees? New measures for performance appraisal," European Journal of Operational Research, Elsevier, vol. 287(2), pages 653-667.

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