subject: Mutual Fund Fee [print this page] Mutual Fund Fee Mutual Fund Fee
In investment schemes, persons come together, into a kind of pool, where money is traded in form of securities, including stocks, bonds, and so on. The central tenet in the operations of mutual funds is this pooling. Normally there are expenses that accrue as a result of these investments. These costs may be transactional, or advisory fees, as well as costs that are incurred in marketing or distribution. It is common in some funds, to charge a certain fee on all investors who seek to invest in these funds. The expenses that accrue out of the running processes in the funds are taken care of from the assets of the funds. The main question here is; who gets to determine how much fee is going to be paid to the fund? This issue has become very controversial in the United States for the last couple of years now. This is because there are those who feel that allowing the funds to set fees in an unregulated manner is likely to cause a lot of tension, sometimes even leading to legal suits. This study is aimed at showing that funds over charge investors, with respect to the advisory fees. To do this, this study will focus on the arguments made by Judge Richard Posner of the United States of America. Posner is one of those who are strongly opposed to the decision by the judiciary, allowing the directors of mutual funds to determine how much is to be paid by the investors in terms of fees. His point of view will be very important to this end. This study will also show why by giving a green light to the directors, the courts neglected the plight of the investors.
Richard Posner on the Mutual-Fund Fees
Richard Posner is a Judge who has in the recent past expressed displeasure with the current set up where the powers at the helm of the mutual funds determine how much is to be paid in fees. It was not so long ago, when the Appellate Court for the Seventh Circuit in the United States decided that it was the directors who had the authority to determine advisory fees. Posner presented strong criticism against this ruling, which he argued amounted to allowing the directors of companies to determine executive compensation. In a case between Jerry N. Jones, Mary F. Jones, and Arline Winerman vs. Harris Associates L.P, a petition was made for a re-hearing of a case in which the plaintiff had sought an appeal against the decision to bestow the authority on funds directors, to determine the amount of advisory fees. The Investment Company Act, Section 36 (b) allows that although the fund directors are the right persons to determine the mutual fund fees, the courts may intervene where the fees charged is off the reasonable limit. This Act provides that the fees should be proportional to the services rendered. The court determined that it is imperative that fiduciaries disclose every possible detail to the potential or existing investor, but refused to place a regulatory requirement as to how much can be charged for advisory services. Judge Posner argues that various economical analyses showed that cases related to executive compensation in big companies, which did public trading were often many and involved unusually high prices. The consideration he made for this trend was that these corporate directors were allowed to regulate compensation, which served as an incentive for excesses. It was possible for instance to find cases where persons were compensated where no work was done. He noted that the mutual fund fees decision would not differ in any ways, from these kinds of excesses in the corporate world. This analogy was well thought because the natural tendency is to benefit oneself without caring a lot about others. Posner noted that board of directors, who in almost all cases are directors of other companies, would rarely vote against the compensation for directors, because it would amount to shooting oneself on the foot. It was also noted that companies that offer consultancy services would hardly propose anything less than better pay for the directors, because the risk involved would be too great. In other words, if a company advises that a director be paid a smaller amount, that director may end up terminating the services that his/her company may have been receiving from that consulting company. Obviously the interests would conflict if negative advice was given (Carter and Chao 1).
It is obvious that mutual funds are not so much divorced from the corporations. Therefore the trend that has been observed in the companies, where directors seek to advance their own interests, will also be evident where mutual fund directors determine how much is to be paid. This is for the obvious reason that, these directors would want to get the most for their funds. Cases of abuse are apparently more common now. This is because; it is possible that persons at the helm of mutual funds create connections that enable them to set higher fees at the expense of the investors.
The understanding as stipulated in the Act, that excessive amount should not be charged is very vague (Hale 1). It leaves a lot of room for abuse because this Act does not define very clearly what is excessive. For instance, if the amount to be charged is set at 0.32 percent of the investment, it might seem very small an amount, until one seeks to invest billions. If one invested seventy billion dollars for instance, the fees charged would be in excess of eighteen and a half million dollars. Everyone would obviously agree that looked at from this perspective, this is a very huge amount. If looked at from the perspective of say, five thousand dollars, it may not seem a very huge amount. It is therefore an understatement, to say that funds are over charging. The amount charged is, as Judge Posner observed, way out of proportion. The only legal requirement on the part of the directors of these funds was that there be no fraud in the way the fees was set.
According to one report, the Securities and Exchange Commission's Office of Economic Analysis suggests that it is necessary that more independent directors be included in the membership of the boards of mutual funds. This, the Securities and Exchange Commission believes, would greatly aid the setting of the fees on a lower scale. It would also cushion investors against possible losses from non performing funds.
