With the oncoming wave of Baby Boomers about to strain Social Security, Medicare, long-term care and families, mutual fund fees are going to continue to be in the crosshairs of class-action litigants, 401(k) plan sponsors, retail investors, regulators, legislators and even the courts.
Whereas investors have unwittingly permitted fund companies to seamlessly subtract their fees from returns, never putting them in black-and-white dollars and cents-and fund companies have largely argued that by publishing their fees in tables satisfies their fiduciary duty-that may soon be coming to an end.
In the recent excessive fee case charging Oakmark Funds' investment advisor, Harris Associates, with imposing excessively higher fees on retail investors that were twice that of Harris' institutional investors, the 7th Circuit Court predictably ruled for the status quo, in support of Harris.
The court's majority decided the firm and its trustees had simply been transparent about the fees and that it upheld the Gartenberg test in that another independent investment advisor would have charged comparable fees. Harris did not, ruled Chief Judge Frank Easterbrook, fail its fiduciary duty. The courts may only get involved if the fees are highly "unusual," Easterbrook added.
But a lone voice in the case, that of Judge Richard Posner, may be the first dissent in others to come. Posner drew attention to the symbiotic relationship between investment advisors and fund boards, noting how there is no financial incentive for them to reject an advisor's contract or whatever fees it deems necessary. Comparing fees to another at arm's-length, the independent advisor is also faulty, Posner said,
because fees are inflated industry-wide and investing does not act like a truly competitive, free market.
Posner slammed that symbiotic relationship, noting the inherently "feeble incentives of boards of directors to police compensation."
According to Morningstar, the Congressional statute dictating that investment companies exercise fiduciary duties is also vague because it doesn't define what that fiduciary duty is.
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