Investing in mutual funds? Beware broker fees, study says

Brokers are supposed to recommend investments that are in the best interests of their clients. But a new study from University of Toronto professor Susan Christoffersen sheds light on which is more important to a broker: the performance of the fund or the fee it pays the broker? The study, published in the February 2013 issue of the Journal of Finance , found that mutual funds offering higher broker fees attract the most investments, especially when the broker is not affiliated with the mutual fund company. Every additional dollar paid to a broker corresponds with another six dollars invested into the fund, and another fourteen dollars if the broker is an unaffiliated third party whose compensation depends exclusively on sales commissions. The study also found these payments are linked to lower investment performance, especially when the fees come from one-time sales loads rather than ongoing payments. It is the first such study to explicitly show how broker fees affect investments into funds and how they subsequently perform. The freedom mutual fund companies have to decide how to compensate brokers has "real consequences" for the brokers' clients, the paper says. The implication, it adds, is there's a strong case for clearly showing customers how much their broker receives from their investment recommendations.