Out of Sight, Out of Mind The Effects of Expenses on Mutual Fund Flows

We argue that mutual fund investors are more sensitive to salient in-your-face fees, like loads and commissions, than operating expenses. Our empirical analysis of mutual fund flows over the last 30 years yields strong support for our contention. We find consistently negative relations between fund flows and load fees. We also document a negative relation between fund flows and commissions charged by brokerage firms. In contrast, we find no relation (or a perverse positive relation) between operating expenses and fund flows. Auxiliary analyses suggest mutual fund advertising, the costs of which are often embedded in a fund’s operating expenses, account for this surprising finding.