Brokers Aren't Boosting Returns, Study Says

Investors in loaded mutual funds underperform their own funds' reported returns by three times as much as no-load fund investors even though the load investors are paying for brokers to help them, according to a new study.

A news release from the Zero Alpha Group (ZAG) said fund investors in all three principal load-carrying retail share classes (A, B, and C) experience worse timing than investors in no-load funds and no-load index funds. That means, the study asserted, that investors in load funds actually suffer more when it comes to timing. Among A,B, and C class funds, “Class B investors suffer from the poorest cash flow timing, underperforming a buy-and-hold strategy by 2.28 percentage points annually, compared with annual underperformance of 0.78 percentage points for investors in pure no-load funds,’ the fund says.

The study concludes: “We find that investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer timing performance than investors who purchase pure no-load funds…. No-load index funds are the only funds found to show no evidence of poor investor timing.”

The announcement said that the actual performance experienced by fund shareholders differs substantially from the performance of the funds in which they invest because of the timing of investor cash flows.

“Investors pay fees to brokers expecting to receive good financial advice, but mounting evidence suggests that many are worse off as a result,’ contended Mercer Bullard, study co-author, founder and president, Fund Democracy, and securities law professor, University of Mississippi School of Law. “Investors’ actual performance has long lagged the performance of mutual funds in which they invest, yet paying for advice from brokers may increase rather than decrease this performance gap. Perhaps brokers shouldn’t always be expected to put you in the fund with the best investment performance, but at least they should get you the returns of the fund they put you in.”

The press release said the study found that:

  • Investors in active funds suffer more than three times the annual underperformance of index fund investors; 1.7% versus 0.47%. Investors in no-load index funds suffer no performance gap, however.
  • Investors in load funds and legal no-load funds (funds with no load and a low 12b-1 fee) experience annual returns that lag the performance of the funds in which they invest by 1.82% and 1.91% respectively. Among all load funds, Class B investors suffer from the poorest cash flow timing, underperforming a buy-and-hold strategy by 2.28% annually. In comparison, investors in pure no-load funds (funds with no commission and no 12b-1 fee) experience an annual performance gap of 0.78%.

Entitled “Investor Timing and Fund Distribution Channels,” the ZAG-sponsored study is co-authored by Bullard; Geoff Friesen, assistant professor of finance, College of Business, University of Nebraska-Lincoln, Lincoln, Nebraska.; and Travis Sapp, assistant professor of finance, College of Business, Iowa State University, Ames, Iowa.

More information is available at