Unlocking Real Value Blog

Supreme Decision on Mutual Fund Fees … Or Was It?

Both sides are claiming victory in yesterday’s Supreme Court decision about fees that mutual funds can charge investors. While on one hand the Court upheld the long-reigning standard for determining whether a fiduciary has breached its duties by charging excessive fees (called the Gartenberg standard), a victory for the mutual fund industry, it did state that courts reviewing such matters may give weight to the comparison of fees charged to institutional versus retail investors. Such comparisons, which are deemed to benefit retail investors, as institutional fees are usually lower, was seen by a victory by the plaintiffs in the case; previous decisions had not gone so far in allowing this comparison.

That there was a little bit of victory for both means that we have probably not seen the last of this issue. But investors will be the winners for sure if the opening of this door by the court – albeit a small opening – means that the Boards which run fund companies will have to keep the possibility in mind that such comparisons are possible. If these Boards take a little more time now when they review the fees associated with their funds than investors should benefit.

The issue of mutual fund fees has been in the news quite a bit lately. A recent article in the New York Times talked about the “hidden” trading costs of mutual funds. The moral here for advisors, especially if fees remain an issue in the news, is to have a policy of full diclosure of fees to clients. The total costs of investments should be explained in detail to clients before they make their investments. “Apples to apples” comparisons should be made between the total cost of one investment versus another (with this comarison including the split between what the advisor is paid versus what the investment charges).

Specifically as relates to mutual funds, such fee comparisons will help uncover whether one alternative fund is significantly more expensive than another. If an investor chooses an expensive fund, then they are doing so with their eyes wide open.

One Response to “Supreme Decision on Mutual Fund Fees … Or Was It?”

  1. Thoughtful article that raises important questions for engaged Investors. Recently, a colleague polled others in the industry. The report indicated much information about published & negotiated asset based rates; however, no information was presented about the total cost to the owners of the assets. Always keep the adages, “low price does not necessarily produce a low total cost” and “value is given when value is received”, in view when making investment decisions.

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