By Mike Rowan, 11/03/2009
Mutual Fund Fees Reviewed by the Supreme Court
The Supreme Court seemed likely that it would maintain the limits on fees investment planners can charge within mutual funds, rather than embrace a new approach proposed by a Chicago judge. investors accuse the managers of the Oakmark series of mutual funds of taking excessive fees, which heard oral arguments Monday in the case of Jones v. Harris Associates.No Limit to Fees Charged within Investment Funds According to Ruling
Chief Judge Frank Easterbrook ruled in favor of the portfolio managers and outlined a broad and liberal view of what fees are acceptable. The judge claimed that any limit is lawful, provided the managers "make full disclosure and play no tricks."But the highest court of the land appeared willing to accept a previous ruling defined by a New York federal appellate court in 1982. That court stated that fees must be "within the range of what would have been negotiated at arm's length in the light of all of the surrounding circumstances."
Mutual Fund Fees Could See Sweeping Changes
The court's ruling could have a dramatic effect on mutual-fund fees. Currently, more than 50 million Americans own shares in mutual funds or similarly structured portfolios. Typically, a mutual fund is created by an investment firm, which then approves the adviser's fee for managing the fund.
To protect investors, Congress in 1970 imposed on mutual-fund advisers "a fiduciary duty with respect to ... compensation for services."
The shareholders alleged that Harris charged Oakmark funds a 0.88% fee on $6.3 billion in assets, nearly twice the 0.45% rate for an unrelated institutional client like a pension fund. The district judge found that since other mutual funds paid their investment advisers similar fees, Harris had not violated its fiduciary duty to Oakmark investors.
Although money managers might welcome a liberal standard like the one endorsed by Easterbrook, even Harris's lawyer accepted there was little chance the Supreme Court would allow the ruling to stand.
Justices Speak out on the Mutual Fund Case
"Are you disavowing the Seventh Circuit's approach?" asked new Justice Sonia Sotomayor. "It doesn't appear as if you are defending their market approach that says, 'So long as the process was fair, any fee is okay.'""These days, all you have to do is push a button and you find out exactly what the management fees are," said Chief Justice John Roberts. "You just look it up on Morningstar and it's right there and you can make...whatever determination you'd like, including to take your money out."
Regardless of the final decision, the mutual fund industry continues to be targeted my consumer and legal groups across the nation. While it is important to minimize the fees that you are paying in your funds, many of the legal expenses may just be passed down to the consumer in even higher expenses as a result.
Therefore, we will have to sit back, and watch the Supreme Court come to a final thought on the process. After all, the few bad apples in the mutual fund industry may in fact cause a revamping of the fee structure as we know them.
