Date of Award
Doctor of Philosophy
Andy Puckett, Matthew Serfling, Marianne Wanamaker
This dissertation utilizes the 2016 Department of Labor (DOL) Fiduciary Rule to analyze the impact of efforts to mitigate broker conflicts of interest on mutual funds. The first chapter examines the effect of the Fiduciary Rule on mutual fund investment. Specifically, I look at changes in the composition of funds available for investment and fund flows during and after the implementation of the Fiduciary Rule. I find that investment companies shifted away from offering investments with broker compensation by eliminating commissioned loads on existing funds, removing funds with broker compensation, and adding funds without broker compensation. This change in investment supply is consistent with changes in demand for these funds. I find that monthly flows to funds with broker compensation arrangements decreased significantly compared to those without such arrangements after the rule was implemented. However, the magnitude of this decrease lessened after the Fiduciary Rule was vacated, indicating that brokers resumed directing flow to funds with compensation after regulatory risk was reduced. The results suggests that conflicts of interest drive fund flows, and efforts to mitigate them can alter capital allocation, primarily driven by the risk-averse nature of brokers avoiding regulatory liability.
In the second chapter, I examine the motivation behind the Fiduciary Rule and its impact on fund performance. The Fiduciary Rule was largely driven by studies that found broker-sold funds to underperform those directly sold to investors. My study confirms this finding, showing that funds with broker compensation tend to underperform those without compensation, excluding commissions. While my results suggest an average underperformance, the Fiduciary Rule's assumed position was that brokers were harming investors by directing capital toward underperforming funds. To evaluate this claim, I compare hypothetical portfolios with and without broker compensation and find no significant difference in risk-adjusted performance on a value-weighted basis, which presents broker allocation efforts more favorably. The average underperformance is mostly driven by small funds, suggesting that brokers may help alleviate underperformance by directing capital away from the worst-performing funds. Finally, I examine how the Fiduciary Rule changed fund performance and find it had little impact on risk-adjusted performance, raising questions about the relationship between fund manager incentives to generate alpha and broker sales incentives.
Kasten, Connor, "Broker Conflict of Interest Mitigation Efforts and Mutual Funds: Evidence from the 2016 Department of Labor Fiduciary Rule. " PhD diss., University of Tennessee, 2023.