Close Close

Portfolio > Mutual Funds

Who's responsible for mutual fund overcharges?

Your article was successfully shared with the contacts you provided.

A case before the Supreme Court will determine if investors can blame a mutual fund’s advisors for charging too much for fees, or if it’s the investors fault for paying them, writes Janet Paskin for SmartMoney.

The 1970 law that established a fiduciary standard for advisors also gave shareholders the right to sue if that standard wasn’t met.

“Over time, that fiduciary standard has been interpreted very broadly,” Paskin writes. “In general, courts have judged a fee too high if it is ‘so disproportionately large that it bears no reasonable relationship to the services tendered.’ In other words, all a fund’s advisor has to do is justify his fees.” Such a justification isn’t that hard, though. “Shareholders have tried to sue their funds more than three dozen times since the law was passed, and they’ve never won.”

In the case at hand, three investors in Oakmark mutual funds claim the funds’ advisor, Harris Associates, charged higher costs to retail investors, according to Paskin. The plaintiffs lost in a lower court, but Frank Easterbrook, the Seventh Circuit Court judge who wrote the opinion, found there’s no need for a higher standard of fiduciary responsibility than what already exists.

“Easterbrook, who is known as one of the country’s most prominent scholars of law and economics, examined the market for mutual funds. He found that, as long as investors can vote with their dollars, and as long as fund trustees can hire and fire the advisors at will, there’s no need for a higher standard of fiduciary responsibility,” Paskin writes.