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Every Cloud has a Silver Lining: On the Relation between Bank-Affiliated Asset Manager Bias and Mutual Fund Fees

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Miersch, E., Schäfer, N. Every Cloud has a Silver Lining: On the Relation between Bank-Affiliated Asset Manager Bias and Mutual Fund Fees. Credit and Capital Markets – Kredit und Kapital, 54(1), 79-116. https://doi.org/10.3790/ccm.54.1.79
Miersch, Enrico and Schäfer, Nils "Every Cloud has a Silver Lining: On the Relation between Bank-Affiliated Asset Manager Bias and Mutual Fund Fees" Credit and Capital Markets – Kredit und Kapital 54.1, 2021, 79-116. https://doi.org/10.3790/ccm.54.1.79
Miersch, Enrico/Schäfer, Nils (2021): Every Cloud has a Silver Lining: On the Relation between Bank-Affiliated Asset Manager Bias and Mutual Fund Fees, in: Credit and Capital Markets – Kredit und Kapital, vol. 54, iss. 1, 79-116, [online] https://doi.org/10.3790/ccm.54.1.79
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Every Cloud has a Silver Lining: On the Relation between Bank-Affiliated Asset Manager Bias and Mutual Fund Fees

Miersch, Enrico | Schäfer, Nils

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 1 : pp. 79–116

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.54.1.79
Language
English
Pages
38
Keywords

Author Details

Enrico Miersch, M-Sc., Justus-Liebig-University Giessen, Department of Financial Services, Licher Straße 74, 35394 Gießen, Germany.

Nils Schäfer, Formerly: Department of Financial Services, University of Gießen, Licher Str. 74, 35394 Gießen, Germany.

References

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  2. Bergstresser, D./Chalmers, J./Tufano, P. (2009): Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry, Review of Financial Studies, Vol. 22(10), 4129–4156.  Google Scholar
  3. Bhattacharya, U./Hackethal, A./Kaesler, S./Loos, B./Meyer, S. (2012): Is Unbiased Financial Advice To Retail Investors Sufficient? Answers from a Large Field Study, Review of Financial Studies, Vol. 25, 975–1031.  Google Scholar
  4. Bollen, N./Busse, J. (2004): Short-Term Persistence in Mutual Fund Performance, Review of Financial Studies, Vol. 18(2), 569–597.  Google Scholar
  5. Bolton, P./Freixas, X./Shapiro, J. (2007): Conflicts of interest, information provision, and competition in the financial services industry, Journal of Financial Economics, Vol. 85(2), 297–330.  Google Scholar
  6. Bucher-Koenen, T./Koenen, J. (2015): Do seemingly smarter consumers get better advice? An analytical framework and evidence from German private pensions. Working Paper.  Google Scholar
  7. Bucher-Koenen, T.,/Ziegelmeyer, R. (2014): Once burned, twice shy? Financial literacy and wealth losses during the financial crisis, Review of Finance, Vol. 18, 2215–2246.  Google Scholar
  8. Busse, J. A./Goyal, A./Wahal, S. (2010): Performance and persistence in institutional investment management, Journal of Finance, Vol. 65, 765–790.  Google Scholar
  9. Calcagno, R./Monticone, C. (2015): Financial literacy and the demand for financial advice, Journal of Banking and Finance, Vol. 50, 363–380.  Google Scholar
  10. Carhart, M. (1997): On persistence in mutual fund performance, Journal of Finance, Vol. 52, 57–82.  Google Scholar
  11. Collins, J. (2012): Financial advice: A substitute for financial literacy? Financial Services Review, Vol. 21, 307–322.  Google Scholar
  12. Cuthbertson, K./Nitzsche, D./O’Sullivan, N. (2010): Mutual Fund Performance: Measurement and Evidence, Financial Markets, Institutions and Instruments, Vol. 19(2), 95–187.  Google Scholar
  13. Daniel, K./Grinblatt, M./Titman, S./Wermers, R. (1997): Measuring Mutual Fund Performance with Characteristic-Based Benchmarks, Journal of Finance, Vol. 52(3), 1035–1058.  Google Scholar
  14. Del Guercio, D., Tkac, P. (2002): The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds vs. Pension Funds, Journal of Financial and Quantitative Analysis, Vol. 37(4), 523–557.  Google Scholar
  15. Elton, E./Gruber, M./Das, S./Hlavka, M. (1993): Efficiency with costly information: A reinterpretation of evidence from managed portfolios, Review of Financial Studies, Vol. 6, 1–22.  Google Scholar
  16. Fama, E./French, K. (1993): Common risk factors in the returns on stocks and bonds, Journal of Financial Economics, Vol. 33, 3–56.  Google Scholar
  17. Fama, E./French, K. (2010): Luck versus skill in the cross section of mutual fund returns, Journal of Finance, Vol. 65, 1915–1947.  Google Scholar
  18. Fama, E./MacBeth, J. (1973): Risk, Return, and Equilibrium: Empirical Test. Journal of Political Economy, Vol. 81(3), 607–637.  Google Scholar
  19. Finke, M. (2013): Financial advice: Does it make a difference? In Mitchell, O./Smetters, K. (2013): The Market for Retirement Financial Advice, Oxford University Press, 229–248.  Google Scholar
  20. Galagedera, D./Fukuyama, H./Watson, J./Tan, E. (2020): Do mutual fund managers earn their fees? New measures for performance appraisal, European Journal of Operational Research, Vol. 287(2), 653–667.  Google Scholar
  21. Gaudecker, H. (2015): How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice? The Journal of Finance, Vol. 70, 489–507.  Google Scholar
  22. Gennaioli, N./Shleifer, A./Vishny, R. (2015): Money Doctors, The Journal of Finance, Vol. 70, 91–114.  Google Scholar
  23. Gil-Bazo, J./Ruiz-Verdú, P. (2009): The Relation Between Price and Performance in the Mutual Fund Industry, The Journal of Finance, Vol. 64(5), 2153–2183.  Google Scholar
  24. Gjergji, C./Kempf, A./Sorhage, C. (2013): Are Financial Advisors Useful? Evidence from Tax-Motivated Mutual Fund Flows, Working Paper.  Google Scholar
  25. Glode, V. (2011): Why mutual funds underperform, Journal of Financial Economics, Vol. 99(3), 546–559.  Google Scholar
  26. Gruber, M. (1996): Another Puzzle: The Growth in Actively Managed Mutual Funds, Journal of Finance, Vol. 51(3), 783–810.  Google Scholar
  27. Hackethal, A./Haliassos, M./Jappelli, T. (2012a): Financial advisors: A case of babysitters?, Journal of Banking & Finance, Vol. 36(2), 509–524.  Google Scholar
  28. Hackethal, A./Inderst, R./Meyer, S. (2012b): Trading on Advice. Working Paper.  Google Scholar
  29. Hoechle , D./Ruenzi, S./Schaub, N./Schmid, M. (2018): Financial Advice and Bank Profits, The Review of Financial Studies, Vol. 31(11), 4447–4492.  Google Scholar
  30. Hurley, R./Gong, X./Waqar, A. (2014): Understanding the loss of trust in large banks, International Journal of Bank Marketing, Vol. 32(5), 348–366.  Google Scholar
  31. Inderst, R./Ottaviani, M. (2009): Misselling through Agents, American Economic Review, Vol. 99(3), 883–908.  Google Scholar
  32. Inderst, R./Ottaviani, M. (2012a): Financial Advice, Journal of Economic Literature, Vol. 50(2), 494–512.  Google Scholar
  33. Inderst, R./Ottaviani, M. (2012b): How (not) to pay for advice: A framework for consumer financial protection, Journal of Financial Economics, Vol. 105, 393–411.  Google Scholar
  34. Jensen, M. (1968): The performance of mutual funds in the period 1945–1964, Journal of Finance, Vol. 23, 389–416.  Google Scholar
  35. Karabulut, Y. (2013): Financial Advice: An Improvement for Worse? Working Paper.  Google Scholar
  36. Kramer, M. (2012): Financial Advice and Individual Investor Portfolio Performance, Financial Management, Vol. 41, 395–428.  Google Scholar
  37. Lachance, M./Tang, N. (2012): Financial advice and trust, Financial Services Review, Vol. 21, 209–226.  Google Scholar
  38. Malkiel, B. (1995): Returns from Investing in equity mutual funds 1971 to 1991, Journal of Finance, Vol. 50, 549–572.  Google Scholar
  39. Monti, M./Pelligra, V./Martignon, L./Berg, N. (2014): Retail investors and financial advisors: new evidence on trust and advice taking heuristics, Journal of Business Research, Vol. 67, 1749–1757.  Google Scholar
  40. Mullainathan, S./Nöth, M./Schoar, A. (2012): The market for financial advice: An audit study, Working Paper.  Google Scholar
  41. Müller, S./Weber, M. (2010): Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds? Schmalenbach Business Review, Vol. 62, 126–153.  Google Scholar
  42. Otten, R./Bams, D. (2002): European mutual fund performance, European Financial Management, Vol. 8, 75–101.  Google Scholar
  43. Pastor, L./Stambaugh, R. (2002): Mutual Fund Performance and Seemingly Unrelated Assets, Journal of Financial Economics, Vol. 63, 315–349.  Google Scholar
  44. Pauls, T./Stolper, O./Walter, A. (2015): Trust and the supply side of financial advice, Working Paper.  Google Scholar
  45. Phillips, B./Pukthuanthong, K./Raghavendra, P./Brisley, N./Chen, J./Christoffersen, S./Rau, S. (2016): Past Performance May Be an Illusion: Performance, Flows, and Fees in Mutual Funds, Critical Finance Review, Vol. 5, 351–398.  Google Scholar
  46. Wermers, R. (2000): Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses. Journal of Finance, Vol. 55(4), 1655–1695.  Google Scholar
  47. Barras, L./Scaillet, O./Wermers, R. (2010): False discoveries in mutual fund performance: Measuring luck in estimated alphas, The Journal of Finance, Vol. 65(1), 179–216.  Google Scholar
  48. Bergstresser, D./Chalmers, J./Tufano, P. (2009): Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry, Review of Financial Studies, Vol. 22(10), 4129–4156.  Google Scholar
  49. Bhattacharya, U./Hackethal, A./Kaesler, S./Loos, B./Meyer, S. (2012): Is Unbiased Financial Advice To Retail Investors Sufficient? Answers from a Large Field Study, Review of Financial Studies, Vol. 25, 975–1031.  Google Scholar
  50. Bollen, N./Busse, J. (2004): Short-Term Persistence in Mutual Fund Performance, Review of Financial Studies, Vol. 18(2), 569–597.  Google Scholar
  51. Bolton, P./Freixas, X./Shapiro, J. (2007): Conflicts of interest, information provision, and competition in the financial services industry, Journal of Financial Economics, Vol. 85(2), 297–330.  Google Scholar
  52. Bucher-Koenen, T./Koenen, J. (2015): Do seemingly smarter consumers get better advice? An analytical framework and evidence from German private pensions. Working Paper.  Google Scholar
  53. Bucher-Koenen, T.,/Ziegelmeyer, R. (2014): Once burned, twice shy? Financial literacy and wealth losses during the financial crisis, Review of Finance, Vol. 18, 2215–2246.  Google Scholar
  54. Busse, J. A./Goyal, A./Wahal, S. (2010): Performance and persistence in institutional investment management, Journal of Finance, Vol. 65, 765–790.  Google Scholar
  55. Calcagno, R./Monticone, C. (2015): Financial literacy and the demand for financial advice, Journal of Banking and Finance, Vol. 50, 363–380.  Google Scholar
  56. Carhart, M. (1997): On persistence in mutual fund performance, Journal of Finance, Vol. 52, 57–82.  Google Scholar
  57. Collins, J. (2012): Financial advice: A substitute for financial literacy? Financial Services Review, Vol. 21, 307–322.  Google Scholar
  58. Cuthbertson, K./Nitzsche, D./O’Sullivan, N. (2010): Mutual Fund Performance: Measurement and Evidence, Financial Markets, Institutions and Instruments, Vol. 19(2), 95–187.  Google Scholar
  59. Daniel, K./Grinblatt, M./Titman, S./Wermers, R. (1997): Measuring Mutual Fund Performance with Characteristic-Based Benchmarks, Journal of Finance, Vol. 52(3), 1035–1058.  Google Scholar
  60. Del Guercio, D., Tkac, P. (2002): The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds vs. Pension Funds, Journal of Financial and Quantitative Analysis, Vol. 37(4), 523–557.  Google Scholar
  61. Elton, E./Gruber, M./Das, S./Hlavka, M. (1993): Efficiency with costly information: A reinterpretation of evidence from managed portfolios, Review of Financial Studies, Vol. 6, 1–22.  Google Scholar
  62. Fama, E./French, K. (1993): Common risk factors in the returns on stocks and bonds, Journal of Financial Economics, Vol. 33, 3–56.  Google Scholar
  63. Fama, E./French, K. (2010): Luck versus skill in the cross section of mutual fund returns, Journal of Finance, Vol. 65, 1915–1947.  Google Scholar
  64. Fama, E./MacBeth, J. (1973): Risk, Return, and Equilibrium: Empirical Test. Journal of Political Economy, Vol. 81(3), 607–637.  Google Scholar
  65. Finke, M. (2013): Financial advice: Does it make a difference? In Mitchell, O./Smetters, K. (2013): The Market for Retirement Financial Advice, Oxford University Press, 229–248.  Google Scholar
  66. Galagedera, D./Fukuyama, H./Watson, J./Tan, E. (2020): Do mutual fund managers earn their fees? New measures for performance appraisal, European Journal of Operational Research, Vol. 287(2), 653–667.  Google Scholar
  67. Gaudecker, H. (2015): How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice? The Journal of Finance, Vol. 70, 489–507.  Google Scholar
  68. Gennaioli, N./Shleifer, A./Vishny, R. (2015): Money Doctors, The Journal of Finance, Vol. 70, 91–114.  Google Scholar
  69. Gil-Bazo, J./Ruiz-Verdú, P. (2009): The Relation Between Price and Performance in the Mutual Fund Industry, The Journal of Finance, Vol. 64(5), 2153–2183.  Google Scholar
  70. Gjergji, C./Kempf, A./Sorhage, C. (2013): Are Financial Advisors Useful? Evidence from Tax-Motivated Mutual Fund Flows, Working Paper.  Google Scholar
  71. Glode, V. (2011): Why mutual funds underperform, Journal of Financial Economics, Vol. 99(3), 546–559.  Google Scholar
  72. Gruber, M. (1996): Another Puzzle: The Growth in Actively Managed Mutual Funds, Journal of Finance, Vol. 51(3), 783–810.  Google Scholar
  73. Hackethal, A./Haliassos, M./Jappelli, T. (2012a): Financial advisors: A case of babysitters?, Journal of Banking & Finance, Vol. 36(2), 509–524.  Google Scholar
  74. Hackethal, A./Inderst, R./Meyer, S. (2012b): Trading on Advice. Working Paper.  Google Scholar
  75. Hoechle , D./Ruenzi, S./Schaub, N./Schmid, M. (2018): Financial Advice and Bank Profits, The Review of Financial Studies, Vol. 31(11), 4447–4492.  Google Scholar
  76. Hurley, R./Gong, X./Waqar, A. (2014): Understanding the loss of trust in large banks, International Journal of Bank Marketing, Vol. 32(5), 348–366.  Google Scholar
  77. Inderst, R./Ottaviani, M. (2009): Misselling through Agents, American Economic Review, Vol. 99(3), 883–908.  Google Scholar
  78. Inderst, R./Ottaviani, M. (2012a): Financial Advice, Journal of Economic Literature, Vol. 50(2), 494–512.  Google Scholar
  79. Inderst, R./Ottaviani, M. (2012b): How (not) to pay for advice: A framework for consumer financial protection, Journal of Financial Economics, Vol. 105, 393–411.  Google Scholar
  80. Jensen, M. (1968): The performance of mutual funds in the period 1945–1964, Journal of Finance, Vol. 23, 389–416.  Google Scholar
  81. Karabulut, Y. (2013): Financial Advice: An Improvement for Worse? Working Paper.  Google Scholar
  82. Kramer, M. (2012): Financial Advice and Individual Investor Portfolio Performance, Financial Management, Vol. 41, 395–428.  Google Scholar
  83. Lachance, M./Tang, N. (2012): Financial advice and trust, Financial Services Review, Vol. 21, 209–226.  Google Scholar
  84. Malkiel, B. (1995): Returns from Investing in equity mutual funds 1971 to 1991, Journal of Finance, Vol. 50, 549–572.  Google Scholar
  85. Monti, M./Pelligra, V./Martignon, L./Berg, N. (2014): Retail investors and financial advisors: new evidence on trust and advice taking heuristics, Journal of Business Research, Vol. 67, 1749–1757.  Google Scholar
  86. Mullainathan, S./Nöth, M./Schoar, A. (2012): The market for financial advice: An audit study, Working Paper.  Google Scholar
  87. Müller, S./Weber, M. (2010): Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds? Schmalenbach Business Review, Vol. 62, 126–153.  Google Scholar
  88. Otten, R./Bams, D. (2002): European mutual fund performance, European Financial Management, Vol. 8, 75–101.  Google Scholar
  89. Pastor, L./Stambaugh, R. (2002): Mutual Fund Performance and Seemingly Unrelated Assets, Journal of Financial Economics, Vol. 63, 315–349.  Google Scholar
  90. Pauls, T./Stolper, O./Walter, A. (2015): Trust and the supply side of financial advice, Working Paper.  Google Scholar
  91. Phillips, B./Pukthuanthong, K./Raghavendra, P./Brisley, N./Chen, J./Christoffersen, S./Rau, S. (2016): Past Performance May Be an Illusion: Performance, Flows, and Fees in Mutual Funds, Critical Finance Review, Vol. 5, 351–398.  Google Scholar
  92. Wermers, R. (2000): Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses. Journal of Finance, Vol. 55(4), 1655–1695.  Google Scholar

Abstract

Considering the institutional factors of the German mutual fund market, we analyze equity fund holdings of German retail clients who received financial advice between 2005 and 2014 to investigate whether those investors overweight the bank-affiliated asset manager and if so, whether this bank-affiliated asset manager bias leads to higher fees, i.?e. Total Expense Ratios. Our analysis clearly indicates the presence of large bank-affiliated asset management biases for clients of all different banking sectors. Thus, German retail clients follow the biased financial advice they receive from their bank. Surprisingly, this bank-affiliated asset manager bias significantly reduces portfolio costs measured via mutual fund fees. Therefore, German banks disproportionately promote products of bank-affiliated asset managers but this biased advice does not lead to higher portfolio costs.

Table of Contents

Section Title Page Action Price
Enrico Miersch / Nils Schäfer: Every Cloud has a Silver Lining: On the Relation between Bank-Affiliated Asset Manager Bias and Mutual Fund Fees 1
Abstract 1
I. Introduction 1
II. Literature Review 5
III. Data and Descriptive Statistics 7
1. Data 7
2. Descriptive Statistics 9
IV. Methodology 1
V. Results 1
1. Presence of Asset Manager bias 1
2. Determinants of Asset Manager Bias 2
3. Asset Manager Bias and Portfolio Costs 2
4. Determinants of portfolio costs 2
5. Impact of Asset Manager Bias on Portfolio Costs 2
VI. Robustness Checks 2
1. Alternative Measure for the Asset Manager Bias 2
2. Alternative Measure for Portfolio Costs 2
3. Alternative Estimation Method 2
4. Analyses of Different Sub-Samples 3
VII. Conclusion 3
Appendix 3
References 3

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