Beyond Performance: Mutual Funds, Non-Alpha Services, and the Value of Financial Advisors
Abstract
We extend the Berk and Green (2004) model to allow clients to derive utility from both performance-related (alpha) services and non-alpha services, such as financial plan- ning. Clients gradually learn about the value of these non-alpha services through their interactions with financial advisors. We test our model predictions using a dataset that covers 3,000 financial advisors and their 500,000 clients’ portfolios over 13 years. Consistent with our model, the total number of client investment plans, our empiri- cal proxy for non-alpha services, is the primary driver of the revenues of broker-sold funds and advisors. Investment skills and performance do not significantly affect their revenues. In line with clients’ gradual learning about the value of non-alpha services, larger advisors experience lower client exit rates and derive most of their revenues from long-term clients who steadily increase their investments and use more non-alpha ser- vices over time. Our findings help rationalize the prevalence of financial advisors with costly investment recommendations and the survival in equilibrium of underperforming broker-sold mutual funds. ∗We are grateful to Jules van Binsbergen for his valuable input during the early stage of this project, to Jennifer Huang (discussant), Alberto Manconi (discussant), and conference participants at EFA 2025, CICF 2025, FMARC 2024, as well as seminar participants at Indiana University, Nova University, London Business School, University of Notre Dame, Bocconi University, Aarhus University, BI Norwegian Business School, University of California San Diego, and University of Southern California. Alessandro Previtero is with Indiana University and NBER. Email: aleprevi@indiana.edu. Ran Xing is with Stockholm University and the Swedish House of Finance. Email: ran.xing@sbs.su.se. 1 Introduction Households rely heavily on financial advisors. In the U.S., advisors intermediate over 50% of mutual fund transactions, and 56% of households repo