Many investors do not realize that fund fees are important when making investment decisions, and instead are swayed by prospectus information even though they sense they are making a mistake, according to the Yale School of Management.
"Our research ads to the growing body of evidence that shows that the average investor is not well equipped to manage their investment allocations," said Professor Choi, a fellow at the Yale School of Management's Center for Customer Insights and International Center for Finance.
The results of the study imply that investors do not thoroughly comprehend that mutual fund fees are important and therefore do not look for fee information in prospectuses.
"If many investors are not paying attention to mutual fund fees, it may be important to create incentives for intermediaries like 401(k) and 529 college-savings administrators to pay attention for them," Choi suggests. "Policy-makers should also consider not only what information to disclose but also how to disclose it. If important information such as a fund's fees were required to be transparent rather than being buried in a long prospectus, investors may be more likely to reallocate investments in lower-cost funds. This would generate pressure for high-fee funds to lower their fees."