Mutual-fund investors ignore cost, focus on gains
News WiseNovember 12th, 2009
Even though the fees and expenses associated with a mutual fund can greatly affect a shareholder's return, consumers are more likely to focus on past performance and virtually ignore cost information, researchers at Furman and Radford universities have discovered.
The findings of the three university professors will be published in the December 2009 issue of the Journal of Consumer Policy. The authors are Thomas Smythe, associate professor of business administration and accounting at Furman; Beth A. Pontari, associate professor of psychology at Furman; and Andrea J.S. Stanaland, assistant professor of marketing at Radford.
"When it comes to investing in mutual funds, consumers tend to make less than rational decisions and often fail to use some of the most important information available to them," Smythe says..
The authors write that consumers generally believe that past performance predicts future performance, but research has shown that high-performing mutual funds generally revert to the market average within two years.
Since costs and fees often have a more substantial impact on how well a mutual fund performs for the shareholder over time, the authors wanted to determine how consumers responded to advertisements containing explicit cost information.
"We wanted to examine whether the Financial Industry Regulatory Authority's (FINRA) new requirements for cost disclosure in mutual fund advertising is having a positive bearing on the consumer's decision," Smythe says. "What we found was that investors remain locked into a return paradigm even when there is highly salient information on fund costs."
The authors wrote that it might be time for FINRA to take another look at whether the changes in advertising have done any good and seek ways to improve the impact.
"Cost information format, repetition, and placement issues must be considered in order to boost the usefulness of cost information to consumers," they say.
The Journal of Consumer Policy is an international journal covering a broad spectrum of consumer affairs issues.