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Are financial advisors useful? Evidence from tax-motivated mutual fund flows

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  • Cici, Gjergji
  • Kempf, Alexander
  • Sorhage, Christoph
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    Abstract

    This study shows that financial advisors provide useful tax advice to their clients, being the first to provide evidence of tangible benefits delivered by financial advisors in the U.S. We find that investors who purchase mutual fund shares through financial advisors exhibit a stronger tendency of avoiding taxable distributions than investors who buy shares directly. This differential is more pronounced for distributions that have large tax implications and are hard-to-predict. Furthermore, the differential gets stronger in December but only when investors face large capital losses, consistent with financial advisors helping the former investors engage in tax-loss selling. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 12-09.

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    Date of creation: 2012
    Date of revision:
    Handle: RePEc:zbw:cfrwps:1209

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    Keywords: mutual funds; taxable fund distributions; financial advisors; after-tax returns;

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    1. Daniel Bergstresser & James Poterba, 2000. "Do After-Tax Returns Affect Mutual Fund Inflows?," NBER Working Papers 7595, National Bureau of Economic Research, Inc.
    2. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
    3. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    4. Barclay, Michael J. & Pearson, Neil D. & Weisbach, Michael S., 1998. "Open-end mutual funds and capital-gains taxes," Journal of Financial Economics, Elsevier, vol. 49(1), pages 3-43, July.
    5. Ivkovic, Zoran & Weisbenner, Scott, 2009. "Individual investor mutual fund flows," Journal of Financial Economics, Elsevier, vol. 92(2), pages 223-237, May.
    6. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
    7. Andreas Hackethal & Michael Haliassos & Tullio Jappelli, 2009. "Financial Advisors: A Case of Babysitters?," CFS Working Paper Series 2009/04, Center for Financial Studies.
    8. George M. Constantinides, 1984. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns," NBER Working Papers 1176, National Bureau of Economic Research, Inc.
    9. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
    10. John Chalmers & Jonathan Reuter, 2012. "What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?," NBER Working Papers 18158, National Bureau of Economic Research, Inc.
    11. redakce, 2012. "n/a," Ekonomika a Management, University of Economics, Prague, vol. 2012(1), pages 72-73.
    12. Diane Del Guercio & Jonathan Reuter, 2011. "Mutual Fund Performance and the Incentive to Generate Alpha," NBER Working Papers 17491, National Bureau of Economic Research, Inc.
    13. Cici, Gjergji, 2012. "The Prevalence of the Disposition Effect in Mutual Funds’ Trades," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(04), pages 795-820, August.
    14. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
    15. Gibson, Scott & Safieddine, Assem & Titman, Sheridan, 2000. "Tax-Motivated Trading and Price Pressure: An Analysis of Mutual Fund Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 369-386, September.
    16. Clemens Sialm & Laura Starks, 2009. "Mutual Fund Tax Clienteles," NBER Working Papers 15327, National Bureau of Economic Research, Inc.
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