Purchasing Mutual Funds Through Brokers of Little Benefit: Study

The Zero Alpha Group continues to hammer away at broker-sold mutual funds with its fifth annual report analyzing the returns of funds purchased through brokers versus those purchased directly.

“Even though they are paying for brokers to assist them, investors in load-carrying mutual funds end up making significantly worse timing decisions than investors in no-load funds, underperforming their own funds’ reported returns by three times as much as no-load fund investors,” according to Zero Alpha. This is due to the timing of their purchases and the benefits of a buy-and-hold strategy.

Zero Alpha found that purchases of funds made through a broker underperform annual returns by 2.28 percentage points, whereas those purchased directly, in pure no-load funds, underperform the funds’ annual returns by 0.78 percentage points.

“This study is another major blow to non-index mutual funds,” said Jeff Buckner, president of Plancorp, a fee-only financial planning firm. “It shows that investors who pay brokers for mutual fund-related investment advice and invest in traditional broker-sold mutual fund shares experience materially worse performance than investors who get no such advice.

Further, paying brokers for advice lowers returns even further, said Mercer Bullard, founder of Fund Democracy and one of the authors of the report. “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.”

Added Bryan Taylor, chairman of Plan B Wealth Management: “This study reminds us that the investment selling industry is fundamentally flawed and cannot be considered to be truly advice-based.”