Lower Mutual Fund Fees Ahead?

Another law suit is brewing as “Supreme Court could cut mutual fund expenses:”

The Court last week said it would hear a case brought against a mutual fund for charging investors too much, and some observers say the decision could set a new standard that will result in lower management fees.

At issue is how courts decide if a mutual-fund manager is charging too much for its services.

Since 1970, when Congress changed the law to allow so-called excessive fee lawsuits, investors have never won a case, though there have been some substantial out-of-court settlements.

What made the case stand out from other excessive fees cases was a spat it triggered between two of the nation’s most respected judges.

In May, Judge Frank Easterbrook ruled for Harris, saying in effect that fees can’t be considered excessive unless fraud was involved. The market, he argued, will ensure that fees aren’t too high because investors essentially will vote with their wallets and dump funds they consider unreasonably priced.

But Easterbrook’s colleague on the Seventh Circuit, Judge Richard Posner, wrote a scathing dissent of Easterbrook’s ruling. Posner argued that leaving fees purely to the market was flawed and called for a rehearing of the case, though his attempt failed.

Posner highlighted a factor that could be considered when judging whether a mutual fund fee is excessive: comparing it to what the fund manager charges institutional clients.

Posner pointed out that Harris charged Oakmark fund investors 1% on the first $2 billion of a fund’s assets. But institutional and other clients were charged roughly 0.5% for the first $500 million and roughly one-third of a percent for everything above. He said this pricing difference was of “particular concern.”

[Emphasis added]

Here you have two judges with opposing views. While I am in favor of lower fees, I believe that each mutual fund company should be able to set their own rates just like any business can charge for goods and services whatever the market allows.

Sliding fee schedules are standard procedure in the financial services industry and having a different set of numbers apply to (large volume) institutional investors compared to (small volume) retail investors seem reasonable as long as they are disclosed to everyone.

We are living in different times now. Only less than 10 years ago, as a mutual fund investor, you did not have the variety of low cost choices as we have now with the proliferation of some 700 ETFs. To me, the answer is simple. If you don’t like a fund for whatever reason (performance or fee structure), you can vote with your feet and go someplace else.

Having the courts decide what a fund company can charge under what circumstances means we’re walking down a very slippery slope with government interference when none is warranted.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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