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Same banks, same clients but different pricing: How do flat-fees for mutual funds affect retail investor portfolios?


Financial advisors should help their clients to find optimal investment products depending on their personal financial situation and preferences. However, when using investment accounts based on commission schemes, incentives of financial institutions and private investors might not necessarily be aligned. To curb the risk of a potential mis-selling and to protect private investors, regulators have reacted either by improving the information flow between the product provider and private investor, or – like in the UK and in the Netherlands – by banning sales commissions altogether.

Whereas such interventions on the supply side have received a lot of attention, the effects on the demand side – the private investors – has not been fully researched. Do private investors change their behaviour in response to commission bans when holding all bank services, especially the financial advice, constant? Does simply changing the way of how private investors pay for financial products affect the perception of (unchanged) financial advice? Do they benefit from a flat-fee scheme for trading and holding mutual funds by improving their portfolio efficiency?

An unique field experiment in Germany

In August 2009, a large online bank operating in the German market was one of the first to introduce a flat-fee model for trading and holding mutual funds. This flat fee runs in parallel with the bank’s traditional commission-based scheme and, importantly, the scope and quality of all services offered to clients as well as support functions are identical in both schemes. We analyse anonymized data from this bank between January 2008 and December 2015 to answer our research questions.

When choosing the flat fee, clients pay 1% p.a. of their total portfolio holdings (including stocks, bonds and funds). In exchange, clients can trade all mutual funds without paying any commissions. Under the traditional commission-based scheme, clients pay front-loads to the bank when purchasing mutual funds (on average, 2.0%) and annual management fees.

All clients, irrespective of whether they opt for the flat-fee or the commission-based scheme, may consult with a team of professional financial advisors at no extra cost over the phone. The advisors are randomly assigned to clients on a call-by-call basis regardless of the client or pricing scheme. The bank’s data we analyse contain de-identified trading records of 55,551 randomly selected clients as well as the date and recommendations of all advisor contacts from 2008 to 2015.

Flat fee users benefit

We find that clients with a higher portfolio value, larger fund shares and better portfolio efficiency (diversification and performance) are more likely to opt-in for the flat-fee scheme service. Clients choosing the flat fee seem to be more financially sophisticated than their peers, who continue to take advice under the commission-based scheme.

We also investigate how clients change their investment behaviour (relative to a control group) after switching from the commission-based to the flat-fee service. Our analysis shows an immediate reaction by those who switch. Users of the flat fee talk more to their advisor, and increase their share of mutual funds, which increases their portfolio diversification. Users of the flat fee also invest more in the stock market as they increase their portfolio values. On the bottom line, clients benefit by using the flat fee by increasing their performance and by improving portfolio efficiency primarily through an improvement in diversification.

Flat fees boost trust in financial advice

Our results suggest that under the flat-fee scheme, clients are more likely to rely on financial advisors’ recommendations, especially those tips about more complex and international products. But why? Because clients seem to trust their financial advisor more. As financial advisors do not earn a commission with each product sold, clients reported in a survey that they perceive the advice under the flat fee of higher quality than that under the commission-based scheme. These are the results of a survey with a subsample of over 700 clients. Customers associate the flat fee at the bank with fairer and better advisor recommendations and feel more confident in investing in international capital markets.

All in all, clients are shown to benefit more from using flat-fee services than commission-based investment services. In the case we analyse, the financial advice and services provided to clients don’t change - but only changing the pricing scheme of trading causes a substantial and beneficial change in investors’ behaviour. Motivating people to use flat-feee services, or offering other no-commission alternatives – our study suggests that this could improve the financial well-being of private investors when it comes to financial advice. It is important to note that our study does not causally show that fee-schemes make people buy more funds and diversify more, it still clearly shows that offering flat-fee is beneficial for the average switcher. Only because of the flat fee become available, switchers increase diverisificaiton and portfolio efficiency.

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Research paper