A look at mutual fund ad research

University researchers have concluded a two-year-old rule requiring equal disclosure of mutual fund expense information alongside performance data may not lead to better decisions by consumers, who tend to ignore the importance of expenses. Here’s some information on the study and its findings:

STUDY AUTHORS: Thomas Smythe, associate professor of business administration and accounting, Furman University, Greenville, S.C.; Beth Pontari, associate professor psychology, Furman University; Andrea Stanaland, assistant professor of marketing, Radford University, Radford, Va.

PUBLISHED IN: Journal of Consumer Policy

RESEARCH GOAL: Examine whether consumers might pay greater attention to fund expenses due to a 2007 Financial Industry Regulatory Authority rule that requires fund ads to include expense information alongside any references about past fund performance. The expense information must be equally as prominent as the performance numbers, in the same text area, and in the same font style and size.

METHODOLOGY: Thirty-three study participants were recruited among university staff and graduate students. Researchers created 18 mock print advertisements containing varying information about fictional funds’ one and three-year returns, and expense ratios. Each bore either the name Fidelity Investments, an actual fund company, or Pinnacle, a fictional brand included as a variable since brand can affect consumers’ views on other fund attributes. Participants were given as much time as they wanted to rank their preferred funds.

FINDINGS: The six funds that participants ranked highest all had strong recent performance. Some also had low costs, but performance was easily the biggest factor affecting fund preference.

CONCLUSIONS: “Our data suggest that in its current form, the FINRA guidelines for advertising may not lead to more informed consumer decision-making. While FINRA has taken an important step to provide information to investors, the impact, in the form of rational investment decisions, may be minimal….FINRA should reevaluate the usefulness of the current changes in ad requirements and research ways to improve their impact. Cost information format, repetition, and placement issues must be considered in order to boost the usefulness of cost information to consumers.”