Mutual Fund Markets as Imperfectly Competitive

Abstract

This study documents why mutual fund markets reflect “imperfect competition.” Fund “prices” are explicit and opaque fees, expenses, costs, and sales loads that fund advisers charge investors for managing portfolios sold at market value. Numerous mutual fund market and fund attributes reflect imperfect competition: (1) characteristics of fund markets; (2) differentiated fund “products”; (3) limits of share classes; (4) failures of Investment Company Act of 1940; (5) failures of independent directors; (6) inadequate disclosure of fund prices; (7) use of conflicted 12b-1 fees; (8) conflicted opaque soft-dollar trades and revenue sharing payments; (9) external governance structure; (10) selection of organization type; (11) inadequate fund accounting for prices; (12) economies of scale and prices; (13) prices of index funds and actively managed funds, and more.The discussions include mutual fund differentiation, funds and legal performance, fund distribution, fund share classes, attributes of imperfect competition, actively managed and Index fund expense ratios, fund advertising and imperfect competition, financial literacy and imperfect competition, past performance and expense ratios, fund fees and performance, imperfect markets and fee mark-ups, agency conflicts and imperfect competition, investment management trusts and competition, and fee-based competition. There is evidence fund competition and regulation are insufficient to ensure fees reflect value created for investors.