Commission bans spur portfolio efficiency and trust in financial advice

A TFI research project by Steffen Meyer & Charline Uhr
Posted on September 09, 2020

"Same banks, same clients but different pricing: How do flat-fees for mutual funds affect retail investors?" is one of the short-term research projects supported by the Think Forward Initiative.

Researchers Steffen Meyer and Charline Uhr investigate the effects of a flat-fee scheme versus a commission-based scheme for investments on investors' behaviors and financial outcomes. Does the way private investors pay for financial products also affect their perception of the financial advice they receive? This study shows that under the flat-fee scheme, trust in financial advice as well as portfolio efficiency increase.

Read more in the summary below or download the report.


Financial advisors should help their clients to find optimal investment products depending on their personal financial situation and preferences. However, when using investment accounts based on commission schemes, incentives of financial institutions and private investors might not necessarily be aligned. To curb the risk of a potential mis-selling and to protect private investors, regulators have reacted either by improving the information flow between the product provider and private investor, or – like in the UK and in the Netherlands – by banning sales commissions altogether.

Whereas such interventions on the supply side have received a lot of attention, the effects on the demand side – the private investors – has not been fully researched. Do private investors change their behaviour in response to commission bans when holding all bank services, especially the financial advice, constant? Does simply changing the way of how private investors pay for financial products affect the perception of (unchanged) financial advice? Do they benefit from a flat-fee scheme for trading and holding mutual funds by improving their portfolio efficiency? These are the main research questions investigated in our TFI project entitled: “Same banks, same clients but different pricing: How do flat-fees for mutual funds affect retail investor portfolios?” In this summary, we are happy to share a brief overview of our main findings, which could be useful to banks and regulators when evaluating the consequences of abolishing commissions to private investors.

An unique field experiment in Germany

In September 2009, a large online bank operating in the German market was one of the first to introduce a flat-fee model for trading and holding mutual funds. This flat fee runs in parallel with the bank’s traditional commission-based scheme and, importantly, the scope and quality of all services offered to clients as well as support functions are identical in both schemes. We analyse anonymized data from this bank between January 2008 and December 2015 to answer our research questions. Figure 1 shows the timeline of relevant events we study.


Figure 1: This chart shows the sequences of relevant events in the field study. The data we use for the paper start in 2008 and end in December 2015. For this period, we possess trading records, portfolio holdings, recommendations by advisors and client socio-demographic information.

When choosing the flat fee, clients pay 1% p.a. of their total portfolio holdings (including stocks, bonds and funds). In exchange, clients can trade all mutual funds without paying any commissions. Under the traditional commission-based scheme, clients pay front-loads to the bank when purchasing mutual funds (on average, 2.0%) and annual management fees.

All clients, irrespective of whether they opt for the flat-fee or the commission-based scheme, may consult with a team of professional financial advisors at no extra cost over the phone. The advisors are randomly assigned to clients on a call-by-call basis regardless of the client or pricing scheme. The bank’s data we analyse contain de-identified trading records of 55,551 randomly selected clients as well as the date and recommendations of all advisor contacts from 2008 to 2015.

Flat fee users benefit

We find that clients with a higher portfolio value, larger fund shares and better portfolio efficiency (diversification and performance) are more likely to opt in for the flat-fee scheme service. Clients choosing the flat fee seem to be more financially sophisticated than their peers, who continue to take advice under the commission-based scheme.

We also investigate how clients change their investment behaviour (relative to a control group) after switching from the commission-based to the flat-fee service. Figure 2 shows the date when a client switches in the flat fee (event-time 0) and the months before and after the switch. Our analysis shows an immediate reaction by those who switch. Users of the flat fee (dotted line) talk more to their advisor, and increase their share of mutual funds, which increases their portfolio diversification. Users of the flat fee also invest more in the stock market as they increase their portfolio values. On the bottom line, clients benefit by using the flat fee by increasing their performance and by improving portfolio efficiency primarily through an improvement in diversification.

Figure 2Figure 2: This figure shows the effect of the switch to the flat fee on measures of advice usage, portfolio allocation and portfolio performance for switching clients compared to propensity-score-matched commission-based scheme clients in event time, analyzing the 12 months before and after the switch. Switchers are defined as commission-based clients who switch to the flat fee. The dotted line illustrates clients switching into the new flat fee, whereas the solid line shows the propensity-score-matched control group of non-switchers.

Flat fees boost trust in financial advice

Our results suggest that under the flat-fee scheme, clients are more likely to rely on financial advisors’ recommendations, especially those tips about more complex and international products. But why? Because clients seem to trust their financial advisor more. As financial advisors do not earn a commission with each product sold, clients reported in a survey that they perceive the advice under the flat fee of higher quality than that under the commission-based scheme. These are the results of a survey with a subsample of 709 clients. Customers associate the flat fee at the bank with fairer and better advisor recommendations and feel more confident in investing in international capital markets.

A competing explanation for why switchers under the flat-fee scheme increase their fund share relates to the sunk-cost fallacy phenomenon, i.e., the tendency that costs paid in the past influence the decision making of today (Arkes & Blumer, 1985). If switchers were confronted with the fact that the flat-fee scheme implied higher total investment cost for their current trading strategy than the former pricing scheme did, they might be tempted to adjust that trading strategy so the cost advantage would bend towards the flat fee. One way clients could perform this action would be by increasing their holdings of mutual funds with higher fees. We do not find any support for that competing explanation.

Additionally, we rule out that our results could also be at least partially driven by novelty effects. Novelty effects occur when using a new service, e.g., excessively using the gym in the first weeks after signing the contract but refraining from the gym afterwards. According to the novelty effect switchers might trade more in mutual funds due to a desire to explore the flat-fee scheme and the corresponding higher attention to trading gained by the switch in comparison to non-switchers for whom these triggers do not exist. To test for this effect, we compare newly advised clients under the commission-based scheme to newly advised clients under the flat-fee scheme. Newly advised clients are clients who use financial advice for the first time after the flat-fee scheme had been made available. We do not find supporting evidence for novelty effects as an explanation for our results.

“Motivating people to use flat-fee services could improve the financial well-being of private investors when it comes to financial advice.”

Our findings are transferable to the broader population of retail investors. First of all, even those clients who were predicted to be less likely to switch to the flat-fee scheme benefit from doing so. Additionally, we replicate our analysis using data from a comparable flat-fee scheme introduction at a large German branch bank in July 2013. In this second bank, the use of advice is much more pervasive among clients (almost all of the bank’s clients participating in the stock market are advised). We also find an increase in portfolio values and an increase in fund shares for clients who adopt the new flat-fee scheme. This shows that our results also hold for clients at different types of banks who are likely to be less capable to invest at the capital market without the help of a financial advisor.

All in all, clients are shown to benefit more from using flat-fee services than commission-based investment services. In the case we analyse, the financial advice and services provided to clients don’t change - but only changing the pricing scheme of trading causes a substantial and beneficial change in investors’ behaviour. Motivating people to use flat-feee services, or offering other no-commission alternatives – our study suggests that this could improve the financial well-being of private investors when it comes to financial advice. It is important to note that our study does not causally show that fee-schemes make people buy more funds and diversify more, it still clearly shows that offering flat-fee is beneficial for the average switcher. Only because of the flat fee becoming available, switchers increase diverisificaiton and portfolio efficiency.


  • Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational behavior and human decision processes, 35(1), 124-140.