Presenter: Alessandro Previtero, Kelley School of Business

Title: The Value of Non-Alpha Services

Abstract: Households invest heavily in actively managed mutual funds with the help of financial advisors. Nonetheless, these advised portfolios underperform passive benchmarks on average. To theoretically explain this evidence, we introduce non-alpha services in the Berk and Green (2004) model. We find that funds with negative net alphas can survive, in equilibrium, by attracting clients who need and value non-alpha services. We empirically test the relevance of non-alpha services, analyzing the revenues of over 2,000 financial advisors over 13 years. As proxied by the number of accounts per client, financial planning services are the major driver of advisor revenues, while alpha services show a weak association with advisor revenues. Non-alpha services could help explain a long-standing broker-sold mutual fund literature puzzle.

Host: Christoph Merkle