There have been several studies showing that expense ratio is the best guide to fund performance -- yet investors still flock to high-fee funds. Why? Steve Beck at MarketWatch looks at new research from the University of Pennsylvania Law School and concludes that those who invest in expensive funds are modern-day snake-oil drinkers, illogically hoping for miracles from a dubious product.

The research that Beck cites, by Tess Wilkinson-Ryan and Jill Fisch, points to two reasons investors choose expensive funds. First, investors believe that past performance is a predictor of future returns. Second, they underestimate or misunderstand the effect of high fees. Even a two hundred basis point fee, Beck writes, "sounds slight in most investors' minds."

Beck hopes that better education and disclosure can help investors make better choices. He writes that "easily understood education delivered investors from their performance bias and fee ignorance, freeing them from the high-fee, snake oil hoax." 

Edited by: Chris Cumming


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