Conflicts of Interest in Mutual Fund Sales

Conflicts of interest can arise when financial advisors and brokers have a financial incentive to recommend certain products to investors. However, identifying the effects and quantifying the costs of conflicted advice has been a challenge for researchers and regulators alike. In this paper, we examine data from the SEC 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.

In this paper, we conclude that:
  • After the passage of Dodd-Frank, relationship between conflicted payments and distribution has weakened, which we interpret to mean that 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 than we would expect until recently, but Department of Labor’s work on a “Fiduciary Rule” seems to have rationalized fund flows, mitigating this effect.
  • We are optimistic that the SEC’s proposed rule—if finalized—would continue these positive trends for investors.

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