Mutual Fund Adviser Fees: Not for Courts to Decide

A federal court ruled that mutual fund adviser fees are best set by market competition and not judicial process.

The decision in Jones v. Harris Associates by the 7th U.S. Circuit Court of Appeals affirmed a lower court decision granting summary judgment to Harris Associates, adviser to Oakmark funds. The decision could have an affect on a variety of mutual fund fee lawsuits, and may have reversed the precedent, according to reports.

The plaintiffs, investors in the Oakmark funds, claimed their fees were too high and that Harris Associates did not disclose some information about its pricing process.

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In affirming a lower court decision granting summary judgment to Harris Associates, the court said competition adequately sets pricing already. The law stipulates that fiduciaries honestly and fully disclose fees—but does not subject them to a cap on compensation.

Writing for the appellate panel, Chief Judge Frank Easterbrook said: “The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth.’

The court also rejected plaintiffs’ argument that Harris Associates committed a wrongdoing by charging a lower percentage of assets to pension clients than to mutual fund clients. Easterbrook wrote that different clients call for different commitments of time, and mutual funds can complicate an adviser’s task.

Lawyers on both the plaintiff and defendant side told The American Lawyer the case might have reversed a precedent, set in the 1980s, of allowing judges to regulate fees.

The decision in Jones v. Harris Associates can be viewed here.