Are mutual fund fees excessive?

• Published in: Journal of banking & finance Vol. 36; no. 8; pp. 2245 - 2259
• Main Authors: Adams, John C., Mansi, Sattar A., Nishikawa, Takeshi
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.08.2012; Elsevier Sequoia S.A
• Subjects: Advisory fees; Board structure; Compensation; Competition; Fee spreads; Fund management; Governance; Investment advisors; Investment decision; Investment trusts; Litigation; Mutual funds; Professional fees; Scandals; Shareholder litigation; Stockholders; Studies; Advisory fees; G20; Mutual funds; G32; Board structure; G34; Shareholder litigation; K22; L22; Fee spreads
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2012.04.003

► Mutual funds employ pricing schemes in multiple share class funds. ► Internal governance mechanisms matter most where investors face high search costs. ► Fee spreads are the range of fees in the lowest and highest cost share classes. ► Funds managed by publicly held firms exhibit disproportionately higher fee spreads. There is a long running debate over whether competition in the mutual fund industry limits the ability of investment advisors to charge fees that are disproportionate to the services they provide. We posit that disproportionately high fees are prevalent in funds with multiple share classes and those with weak governance structures. Using a comprehensive sample of index mutual funds for the from 1998 to 2007, we find that internal governance mechanisms matter primarily for funds with relatively small share classes where investors often face increased search costs and/or restricted access to competitive mutual funds. Additionally, we find that funds managed by publicly held sponsors are associated with disproportionately higher fee spreads (about 28 basis points). The results are robust to the inclusion of board characteristics, share class structure, and investment objectives. Overall, our findings suggest that competition and agency considerations are important determinants in the pricing of mutual funds.