Supreme Court Weighs in on Mutual Fund Fees

The nation’s highest court issued its views on Jones V. Harris Associates, in which investors in Oakmark mutual funds sued the fund manager for allegedly excessive fees. The case reached the Supreme Court after a lower court overturned the “Gartenberg standard.” Under this standard, which was established by a court ruling in 1982, the only way for an investor to prove that a fund’s fees were excessive was to establish that the fees were not properly negotiated with the fund board.

The high court re-established Gartenberg and went further. The ruling accepted the argument that judging whether a fee is excessive requires comparing the charges applied to different types of clients. This brings to light the large discrepancy in fees between individual/retail investors and institutional investors. This new interpretation may require fund managers to inform their boards how much they charge and explain the differences. This may prove very difficult.

Investors should realize that almost all fund companies are profit seeking. It’s pretty obvious that the more they charge you, the more profit they generate. Wise investors look for funds with low fees and high marks for stewardship from Morningstar.

Source: The Wall Street Journal