Supreme Court Case on Fund Fees Could be Landmark

The Jones v. Harris Associates fund fee case pending before the Supreme Court could very well be found in favor of investors, and if so, that could have tremendous ramifications for the 53 million American households that own mutual funds, The Wall Street Journal reports.

It is the latest in a growing number of articles that hint the case could be ruled in favor of the plaintiffs.

The case was originally filed in 2004 by  three investors in Oakmark funds who contested that the retail fees they were paying were for comparable services that institutional investors were receiving and that the board of directors was not sufficiently independent.

Industry insiders believe the Supreme Court could provide guidance to fund boards on how to negotiate lower fees starting with no longer permitting former executives of an asset management firm to sit on a fund’s board after leaving the company two years prior as a so-called independent director. “You can’t have people who have a conflicted interest in negotiating the best possible fees for themselves or their former colleagues,” said Max H. Bazerman of Harvard Business School.

Second, the article notes, while fund companies do allow for free reduction breakpoints when a fund hits a certain asset level, those asset levels are very high and the breakpoints are very low. “Most breakpoints are meaningless rounding errors,” said Dan Calabria, former president of Templeton Funds Management.  “You sit there and you’re stunned at how inconsequential it is.”

Third, the information an investment advisor provides to a fund board either justifying current fees or asking for them to be raised is biased, some executives say. The court should require fund boards to review objective data alongside comparables for similar funds as well as index funds.

As The Journal puts it, “Fees will never fall in a world where management spins the data to its own benefit.”