Mutual Funds, The Supremes & Fees

By the time you read this the Supreme Court may have already decided on reducing the fees that the mutual fund industry charges its customers for managing their money.

The case is all about how much is too much. The entire magilla began when three shareholders of a certain mutual fund family filed suit stating that the average retail fund customer paid twice as much for the fund's management services as did the same fund's pension and institutional clients.

The mutual fund management responded that they did more work for the retail customer and therefore the higher fees. And, when you think about it if you manage a one million dollar pool of money versus a ten thousand dollar account it does make some sens that the larger account is the same amount of work, earns substantially more in fees even at the smaller percentage of assets.

Not so, pipes Jack Bogle, founder of Vanguard Funds, and a consumer advocate for low fees and index fund management. Fund fees have taken the wrong road and have gotten totally out of hand.The higher the fees the less the client is able to retain. Even the smallest increase becomes substantial over a period of 10, 20 or 30 years. This coming from a man who earned millions and millions selling the American investor on indexing; or what I call charging a fee for no active management. To me this is no different then Michael Moore poking fun at rich people while banking hundreds of millions from his books and movies.

Now before you get all giddy that the load mutual fund industry is getting their comeuppance I should mention that the mutual fund in question is a no-load. The lead manager of the fund took home $12 million dollars in 2002 as compared to the average fund manager who earned some $800,000. The year in question was a rotten year for investors who lost 22% if they had invested in the S&P 500 but lost 14% if they had invested with the fund in question. So was the fund manager worth all that money? Probably not, but that's a question for investors and the Board of Directors to deal with and not the Supreme Court.

Giving a win to the shareholders is going to open a Pandora's Box of misery for the entire fund industry. Lawyers will declare open season on all funds before you can say Jiminy Cricket. And Harvard law professor Jesse Fried agreed by saying the Supreme Court victory would keep costs down by having plaintiff attorneys monitor fund company compensation structure. That's a nice way of saying it'll be feeding time at the shark pool.

This could be more about clamping down on income earned by money managers then it is about mutual fund's expense rations. If that is indeed the case the money management talent will move to where they will be fairly compensated.

In the end you have to wonder why these fund shareholders picked this fight when there are thousands of fund choices out there where they could invest their money, many offering identical services at less cost? Make no mistake if the activists win the average fund investor will lose with higher fees going to lawyers to protect the fund's interest.