Mutual Fund Advertising Research Articles

Evaluating Efficacy of Statutory Disclaimers of Mutual Funds on Novice and Seasoned Investors

The purpose of the present study was to empirically examine the efficacy of statutory disclosures in the Indian mutual fund industry. Whether the disclaimers aid investors in their decision-making process was investigated. The study made a distinction between type of investors (novice and seasoned investors) as disclaimers affect differently on investor’s belief, attitude and ability to take informed decision. Survey was conducted using a structured questionnaire to evaluate the responses of 388 investors, consisting of 243 novice and 145 seasoned investors. Data was analyzed using mean comparison, independent t-test, and logistic regression model. Results revealed that statutory disclaimers were less effective on seasoned investors compared to novice investors. This suggests seasoned investors process the disclaimer information differently. Novice investors systematically process the disclaimers of mutual fund advertising, and their investment decision was meaningfully affected by the disclaimers. The study offers specific suggestions for stakeholders working in the area of behavioral finance, highlighting the importance of considering the dual process theory of information processing. To the best of authors knowledge, this study is the first of its kind to evaluate the efficacy of mandatory disclaimers in the Indian mutual fund industry, providing unique insights for future research in the field.

Why Does Mutual Fund Advertising Work? Some Complementary Evidence

The basic question that this article addresses is: Why does mutual fund advertising work? The summation of external evidence is compatible with evidence that greater mutual fund advertising attracts investors with below-average financial literacy who find the investment decision process overwhelming:1. Investor levels of financial literacy predict differences in investment behavior.2. Investors with below-average financial literacy are overwhelmed by information overload in the investment process and opt out.3. Investors with below-average financial literacy make non- normative “revealed preference” choices that include passive investment, avoidance of investment complexity, and decisions based on limited experience.4. Investors with below-average financial literacy are attracted to funds (increased flow) that come to their attention through greater fund advertising.5. Investors with below-average financial literacy favor broker-sold funds, which underperform direct-sold funds even on a pre-distribution fee basis.6. Broker-sold funds with larger front-end loads and distribution fees provide agency incentives for brokers to sell higher-cost and lower-performing funds for their own benefit.7. Funds sold through selected superior financial advisors are to be favored over broker-sold funds due to higher standards of legal performance, higher quality and range of services, lower-cost and higher-performing funds, and “fee only” charges.

Perceived risk and the interplay of expert endorsement, corporate image and investment knowledge in mutual fund advertising

This study aims at examining the effects of expert endorsement, corporate image and investment knowledge on individuals’ perceived risk in mutual fund advertising. Based on the results from a content analysis of 341 print advertisements of mutual funds in Hong Kong, a 3 (advertising texts about corporate image: corporate management, financial performance, corporate responsibility) × 2 (visual of expert endorser: presence, absence) between-subjects online experiment was subsequently conducted. The content analysis showed that visuals of experts had a significant relationship with corporate attributes in the advertisements. Results from the experimental study revealed that the participants reading the expert-endorsed advertisement about corporate management were more favorable toward the advertiser’s corporate image. The participants’ investment confidence posed a significant effect to their favorability toward the advertiser’s corporate image and subsequently their willingness to invest. When formulating communication strategies for financial products and services, practitioners should pay attention to the effect of expert endorsement in enhancing individuals’ favorability of the corporate image, as well as the effect of individuals’ investment confidence on individuals’ willingness to invest.

The Effect of Monetary Policies on the Relationship between Advertising and Mutual Fund Flows

AbstractThis paper investigates the effect of monetary policies, mainly proxied by interest rate changes, on the relationship between advertising and subsequent net cash flows for Taiwan's mutual fund industry. Based on a comprehensive mutual fund dataset and allowing for a precise estimation of fund inflows and outflows, we find that there is a positive advertising–cash flow relation under different macroeconomic conditions. Taking into account a change in the interest rate, we document that the positive relationship between the two only exists when the interest rate is at a relatively low level regardless of restrictive and expansionary periods. Our empirical findings shed new light on marketing strategies whereby mutual fund advertising works well during relatively low interest rate environments, which are generally interpreted as exhibiting low cost of capital and a good signal of future economic conditions.

Effect of Monetary Policies on the Relationship between Advertising and Mutual Fund Flows

This paper investigates the effect of monetary policies, mainly proxied by interest rate changes, on the relationship between advertising and subsequent net cash flows for Taiwan’s mutual fund industry. Based on a comprehensive mutual fund dataset and allowing for a precise estimation of fund inflows and outflows, we find that there is positive advertising-cash flow relation under different macroeconomic conditions. Taking into account a change in the interest rate, we document that the positive relationship between the two only exists when the interest rate is at a relatively low level regardless of restrictive and expansionary periods. Our empirical findings shed new light on marketing strategies whereby mutual fund advertising works well during relatively low interest rate environments, which are generally interpreted as exhibiting low cost of capital and a good signal of future economic conditions.

Risk Perceptions of Mutual Funds-Evidence from an Experimental Approach

Analysis of mutual fund advertisements in previous research has shown that most (88%) do not contain all the requisite information on the risk-return trade-off, principal-agent conflict, and transaction costs that consumers need to optimize their investment decisions. This research reports the findings of an experiment carried out to understand the Huhmann-Bhattacharyya (2005) paradox. Results indicate that including information on risk-return trade-off, principal-agent conflict, and transaction costs in mutual fund advertisements increase consumer risk perceptions of the mutual fund. This result has important policy implication for levelling the playing field in mutual fund advertising. For example an interesting and important public policy question would be whether or not financial literacy training alters advertising information usage and attitudes. Results could help determine public policy on imparting financial literacy training to the general population.

The Interplay between Advertising Disclosures and Financial Knowledge in Mutual Fund Investment Decisions

This study examines the relationship between financial disclosures and investors' financial knowledge on investor decision making within the context of mutual fund advertising. Experimental results suggest that mutual fund ads with financial disclosures are more likely to generate higher levels of recall and positive thoughts regarding advertised information for the mutual fund, more favorable attitudes toward the mutual fund, and greater investment intention. Results also suggest that the impact of advertising disclosure on the outcomes of financial behavior (e.g., recall, cognitive response, attitude toward mutual fund, and investment intention) can be moderated by the level of an investor's financial knowledge. Investors with low financial knowledge were likely to systematically process advertising claims and generate more attribute‐related thoughts regarding the advertised mutual fund when exposed to advertising disclosures while advertising disclosures had an insignificant effect on attribute‐related thoughts among investors with high financial knowledge.

Does Advertising Moderate Mutual Fund Investor Post-Purchase Decisions?

This paper investigates how advertising influences the patterns of fund investor’s post-purchase behavior as related to fund performance. The evidence shows that fund consumer behavior is influenced by mutual fund advertising in ways similar to goods markets. We find that fund investors are willing to sell winning and are reluctant to sell losing funds. This asymmetric redemption-performance relation is in line with the disposition effect. This study also shows that consumers are less willing to sell winning funds with high fund family advertising than those with low fund family advertising, and are more reluctant to redeem losing mutual funds with high fund family advertising than those with low fund family advertising. A possible explanation for our findings is that advertising may reduce the level of cognitive dissonance, create consumer loyalty, and enhance investors’ risk tolerance, thus giving consumers more incentive to hold both losing and winning funds with high levels of advertising.

Mutual Funds: Advertising, Behavioral Models, andInvestor Choice

This article examines theories of advertising and investor behavior that apply to mutual fund advertising and investor choices. Mutual fund advertising and its effect on investor fund choice is assessed in the context of the role of advertising, advertising as persuasion, investor choice, investor revealed preferences, affect as persuasion, and human behavior. Among the findings is that highly educated and wealthy mutual fund investors as well as more financially savvy investors tend to make <i>poorer</i> fund choices. <b>TOPICS:</b>Mutual fund performance, wealth management, in portfolio management

Mutual Funds: Advertising, Behavioral Models, and Investor Choice

This article provides theories of advertising and investor behavior that apply to mutual fund advertising and investor fund choices. Mutual fund advertising and its effect on investor fund choices is assessed in context of the role of advertising, advertising as persuasion, investor choice, revealed preferences, affect as persuasion, and human behavior.Among the more interesting findings is that highly educated and wealthy mutual fund investors as well as more financially savvy investors tend to make relatively poor fund choices.

Mutual Funds and Investor Choice: Paths to the 'Wizards of Advertising and Overconfidence'

This article explores the relationships of mutual fund advertising and investor skill in making fund choices. Fund advertising dominates the choices of unsophisticated investors. Advertising appeals to investor emotions by resonating with current beliefs, not by providing information that enables more informed fund choices. Choices of unsophisticated investors are dominated by fund advertising - The Wizards of Advertising.” Sophisticated investors with self-assessed above average investment skills believe they make superior choices of actively managed mutual funds that will outperform index funds. However, sophisticated investors are not superior investors but overconfident investors - The Wizards of Overconfidence.” There are four paths to the truth about mutual fund advertising and investor investment skills. These paths are investor financial literacy, investor revealed preferences, advertising and investor choice, and advertising as persuasion. Each path is reviewed and its individual findings provided.

Why Does Mutual Fund Advertising Work? Some Complementary Evidence

The basic question this article asks is: why does mutual fund advertising work? The article concludes that advertising by larger mutual funds attracts investors with below-average financial literacy who find the investment decision process overwhelming.

Investor Learning and Mutual Fund Advertising and Distribution Fees

Some studies show that investors invest in funds that attract their attention through advertising rather then doing their own research on potentially more appropriate funds. The cost of advertising is just one more expense to the fund that impacts the investor. This article looks at 12b-1 fees and their effects and transformation. <b>TOPICS:</b>Mutual fund performance, performance measurement

Regulating Information Disclosure in Mutual Fund Advertising in the United States: Will Consumers Utilize Cost Information?

Consumer decision making with regard to mutual funds is less than rational. Consumers tend to focus on past performance and virtually ignore a variable which has a more definite (and negative) impact on wealth—cost. FINRA, the mutual fund industry’s self-regulatory body in the USA, has recently changed its regulations for fund advertising to require that cost information be reported when performance information is present. We conducted an exploratory conjoint study to examine whether consumers might, in fact, use the additional information, and found that despite the highly salient presence of expense information, consumers overwhelmingly continue to use past performance when forming mutual fund preference.

Selection Neglect in Mutual Fund Advertisements

Mutual fund companies selectively advertise their better-performing funds. However, investors respond to advertised performance data as if those data were unselected (i.e., representative of the population). We identify the failure to discount selected or potentially selected data as selection neglect. We examine these phenomena in an archival study (Study 1) and two controlled experiments (Studies 2 and 3). Study 1 identifies selection bias in mutual fund advertising by showing that the median performance rank for advertised funds is between the 79th and 100th percentile. Study 2 finds that both novice investors and financial professionals fall victim to selection neglect in a financial advertising task unless the advertisement makes the selective nature of available performance data transparent. Study 3 shows that selection neglect associated with a large well-known company can be debiased with a simple extrinsic sample space cue, although individual differences in statistical reasoning also matter. We argue that selection neglect results from a general tendency to ignore underlying sample spaces rather than a fundamental misunderstanding about the data selection process or the value of selected data.

Investor Learning and Mutual Fund Advertising and Distribution Fees

Barber, Odean, and Zheng’s (2005) analysis of mutual fund front-end loads, sales commissions, and operating expenses finds that over the past several decades ordinary investors have “learned” what it is they value in choice of funds. And, fund advisers learned early on to provide what attracts ordinary investors to particular funds - larger advertising. While advertising now represents only two percent of 12b-1 fees, it remains large enough in absolute terms to be effective in attracting ordinary investors and increasing fund flow. The resulting growth in fund asset size has benefited advisers with additional economies of scale and larger dollar receipts of operating expenses, including management fees and 12b-1 fees. Fund shareholders thus pay major asset and performance penalties by giving such little consideration to fund operating expenses, especially component 12b-1 fees.Distribution fees, a major category of the New Total Expense Ratio, are the focus. Distribution fees (%) include (1) selling group payments of (a) dealer (broker) concessions and (b) account servicing fees; (2) revenue sharing payments net of adviser fall-out benefits that include (a) broker marketing pools, (b) broker (bonus) compensation, (c) syndicated distributions, (d) sub-transfer agency fees, and (e) networking fees; and (3) soft-dollar trades net of rebates to advisers. Mutual fund distribution fees have major agency conflicts with fund shareholder assets and performance. Fund adviser/distributors should be prohibited from using fund assets to make distributor fee payments to brokers. Brokers should include any of what are currently called broker (dealer) concessions, account servicing fees, and component revenue sharing payments they wish to impose as one time upfront charges at time of investor share purchase. Further, fund adviser fall-out benefits on revenue sharing payments and soft-dollar trades should be prohibited by regulation.

Mutual fund advertising: Should investors take notice?

This research investigates the relationship between advertising, quality, and price in the mutual fund market, considering both equity and fixed income funds. The research considers these relationships based on the results for a time period following the advertisement. Given the complexity of the mutual fund purchase decision for investors, this research provides an initial investigation into whether investors can infer mutual fund quality and price from the presence of mutual fund advertising. Post-advertising period results show a negative relationship between advertising and fund quality, indicating that previously advertised funds exhibit weaker performance than nonadvertised funds. During the post-advertisement period, both equity and fixed income funds exhibit lower expenses (ie, price) than nonadvertised funds. These research findings and implications for theory are discussed.

Coarse Thinking and Persuasion*

We present a model of uninformative persuasion in which individuals “think coarsely”: they group situations into categories and apply the same model of inference to all situations within a category. Coarse thinking exhibits two features that persuaders take advantage of: (i) transference, whereby individuals transfer the informational content of a given message from situations in a category where it is useful to those where it is not, and (ii) framing, whereby objectively useless information influences individuals’ choice of category. The model sheds light on uninformative advertising and product branding, as well as on some otherwise anomalous evidence on mutual fund advertising.

Coarse Thinking and Persuasion

We present a model of coarse thinking, in which individuals group situations into categories, and transfer the informational content of a given message from situations in a category where it is useful to those where it is not. The model explains how uninformative messages can be persuasive, particularly in low involvement situations, and how objectively informative messages can be dropped by the persuader without the audience assuming the worst. The model sheds light on product branding, the structure of product attributes, and several puzzling aspects of mutual fund advertising.

Madison Avenue Meets Wall Street: Mutual Fund Families, Competition and Advertising

Madison Avenue Meets Wall Street: Mutual Fund Families, Competition and Advertising