Lower Mutual Fund Fees Ahead?

Ulli Uncategorized 5 Comments

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.

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Comments 5

  1. Ulli,

    Those guys in Washington need to be replaced with people who understand what is going on. These guys probably couldn’t even judge themselves according to what was said in the blog, just think about it, they are our leaders and can’t even run their own lives in a smooth fashion.

    Where are all of O’bama’s changes, all I have heard is talk and not much action. Sound familar? Rememember the last 8 years of wasted spending, war after war, recession etc.

  2. Ulli looking forward to your post on the stock market. If i understand your posts in the past. An investor puts in 33% in to start with and awaits a 5% increase before investing another 33% and then the rest after another 5% increase. After the 6% increase today I am wondering weather we are now starting to go long in the market……Snoobers

  3. It might be worthwhile to point out that institutional investors basically manage for failure, or put another way, their funds, pension or whatever, are managed to fail.

    They never sell out in bears. While individuals are more likely to.

    So it is intuitive to me that mutual fund managers stand to gain more from institutional investors who provide fees even when they are taking big haircuts. Even if the fee rates are lower.

    I’d like to see Posner’s entire opinion text to see if he ever addressed this difference. It might put his opinion in a different light if in fact he did recognize this.


  4. We’ve all seen just what unfettered capitalism has wrought without any regulation. The first commentor is yur typical right wing zealot. Obviously, hoping from mutual fund to mutual fund is much easier said then done for the avg John Q if a fund raises its rates conpriciously and arbitrarily. M.Funds imposed penalities at will when it suited them to stop that easy flow in and out of funds. I wonder Ulli, how open and easily seen are all m.funds fees posted for the avg John Q. Credit card companies can legally charge up to 84% interest by law although most are still only in the 30% range. I accept with those reading this the mkt is sacred until it needs help or some reg passed in its favor. As long as all of those fees are in a prominent position and the percentage above or below the industry stnd which truly puts all funds on an equal footing.

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