TY - JOUR AU - Guercio,Diane Del AU - Reuter,Jonathan AU - Tkac,Paula A. TI - Broker Incentives and Mutual Fund Market Segmentation JF - National Bureau of Economic Research Working Paper Series VL - No. 16312 PY - 2010 Y2 - August 2010 UR - http://www.nber.org/papers/w16312 L1 - http://www.nber.org/papers/w16312.pdf N1 - Author contact info: Diane Del Guercio Lundquist College of Business 1208 University of Oregon Eugene, OR 97403-1208 E-Mail: dianedg@lcbmail.uoregon.edu Jonathan Reuter Carroll School of Management Boston College 224B Fulton Hall 140 Commonwealth Avenue Chestnut Hill, MA 02467 Tel: 617/552-2863 Fax: 617/552-0431 E-Mail: reuterj@bc.edu Paula A. Tkac Research Department 1000 Peachtree St. NE Atlanta, GA 30309 E-Mail: paula.tkac@atl.frb.org M2 - featured in NBER digest on 2011-01-01 AB - We study the impact of investor heterogeneity on mutual fund market segmentation. To motivate our empirical analysis, we make two assumptions. First, some investors inherently value broker services. Second, because brokers are only compensated when they sell mutual funds, they have little incentive to recommend funds available at lower cost elsewhere. The need for mutual fund families to internalize broker incentives leads us to predict that the market for mutual funds will be highly segmented, with families targeting either do-it-yourself investors or investors who value broker services, but not both. Using novel distribution channel data, we find strong empirical support for this prediction; only 3.3% of families serve both market segments. We also predict and find strong evidence that mutual funds targeting performance-sensitive, do-it-yourself investors will invest more in portfolio management. Our findings have important implications for the expected relation between mutual fund fees and returns, tests of fund manager ability, and the puzzle of active management. Furthermore, they suggest that changing the way investors compensate brokers will change the nature of competition in the mutual fund industry. ER -