Sept. 30, 2019
Darla Moore School of Business associate professor Hugh Hoikwang Kim received a grant from the USC provost’s office to further test his research on investors’ inattention levels to mutual fund fees.
Given over two years between July 1, 2019 – June 30, 2021, the $19,500 grant will allow Kim and his co-author, a former Moore School assistant professor, Wenhao Yang, currently at the Chinese University of Hong Kong, Shenzhen, to do large-scale experiments to determine the attention and cognitive ability levels investors lend to mutual fund fees.
In a working paper in 2018, Kim and Yang surveyed close to 1,200 Americans to assess investors’ attention level to mutual funds fees and analyze the impact of their cognitive ability and financial literacy on such attention. Their research shows that individuals investing in mutual funds are paying more fees than they realize.
Based on the research findings, the authors estimate that the mutual fund industry could charge more than 30 percent more fees because of investors’ inattention, which equates to $16 billion a year in more revenue for mutual fund companies.
“Mutual funds are primary investment vehicles for retail investors, especially for retirement savings,” Kim said. “The cost of investing in mutual funds directly affects investment returns and the welfare of retail investors.”
Regulators such as the U.S. Securities and Exchange Commission have been working on improving the fund disclosure to help investors better understand the mutual fund fee structure, Kim said.
The research also shows that the cognitive abilities of the investors greatly affect the inattention level to mutual funds fees, taking into account demographics and the economic backgrounds of investors.
Before their research, Kim and Yang note there had been little analysis quantifying the attention level of investors to mutual fund fees and identifying the determinants of the attention.
Quantifying the attention levels shows how much money investors could be wasting on fees instead of contributing the funds to their actual investments. This is especially important for individuals saving for retirement; the less they have when they are ready to retire can affect their quality of life and if they are even able to retire when they choose.
To continue their research on measuring the inattention levels for mutual fund fees, Kim and Yang will use the provost grant funds to run the experiment with a larger representative sample of the U.S. population. The primary purpose of this additional analysis is, the authors say, to verify that the preliminary research findings are also observed in a more widespread general population in the United States.