The Supreme Court handed down a highly-anticipated decision on mutual fund fees yesterday and a strange thing happened.
Both the mutual fund industry and the people who are seeking leverage in bringing down fees declared victory.
At least one renowned expert — Tamar Frankel, a Boston University School of Law professor – doesn’t believe that the mutual fund industry should be putting the champagne on ice.
The mutual-fund-fee decision handed down yesterday by the Supreme Court puts more onus on mutual fund boards of directors to investigate advisors’ fees, she said.
It likely will mean that fund advisors must offer the boards more information about how much they charge clients such as pension funds for the same services, Frankel added.
Surprised and delighted
She said the ruling “surprised and delighted me,” because it requires boards of directors to compare the fees the mutual funds are being charged with those that are being paid to companies that have more negotiating power.
“If people with muscle can get better deals, that means the little guy should get the same deals,” she said.
The little guy is the consumer and generally RIAs ally themselves with this constituency. Some RIAs, however, also advise mutual funds.
In fact the court case was originally brought by three investors in the Oakmark family of funds against its advisor Harris Associates L.P.
Discrepancies are typical
The issue was that Harris was charging the mutual funds much more in fees than it was charging pension fund clients. Such discrepancies are typical in the industry, though why they exist is a matter of debate.
Under the Investment Company Act of 1940, mutual fund shareholders are allowed to sue mutual funds over excess fees. The courts then subject the fees to what’s known as the 1982 Gartenberg standard.
The courts deciding the case ask whether the mutual fund directors or trustees had considered factors such as costs of other mutual funds, fallout benefits, economies of scale.
No investor has ever won a case against a mutual fund company, but some have probably been settled, according to legal writings about the standard.
“People with muscle”
Yesterday’s unanimous decision endorsed the standard, but also added a new factor to the list: whether the advisor is charging “people with muscle” — i.e. institutional investors — less money, Frankel said.
The court ordered the the U.S. Court of Appeals for the Seventh Circuit to re-examine the case, known as Jones v. Harris Associates L.P.
Frankel also placed the decision in the context of new and stronger questions that are being raised about mutual fund fees in general.
RIABiz has covered the rise of ETFs, which are increasing in popularity in part because of high mutual fund fees. Read: Four hot topics in compliance from the IAA conference
Great for the ETF business
“High mutual fund fees have been great for the ETF business and this ruling should continue to push disenchanted investors toward ETFs, especially if the courts will give deference to fees agreed upon by independent boards and their advisors,” said one advisor who asked not to be named.
Frankel agreed that there’s an emerging awareness of high fees.
“They are expensive, too expensive,” she said. “People have had enough. And when did they have enough? When the market crashed.”