With such real-life consequences in mind, AARP Foundation Litigation and the Consumer Federation of America filed a friend-of-the-court brief in Jones v. Harris on behalf of Winerman and her fellow investors. Noting that the amount investment advisers are paid for their services is deducted from mutual fund assets, the brief said that “resolution of the issues in this case will have a significant impact on the ability of current and future retirees to realize financial security in retirement.”
Winerman puts it more plainly. “This is my retirement,” she says. “This is what I’m going to live on for the rest of my life.”
Challenging the fees
While mutual funds offer convenience to investors, their structures are often far from simple. The Oakmark group of mutual funds was created by Harris Associates, which also decided who would sit on the fund’s board—the same board that approves the fees to be paid to Harris for its advisory work. It’s a common structure in the industry, and one that inherently poses a conflict of interest, critics say.
Congress attempted to address that sort of conflict in 1970, when it amended the Investment Company Act, a 1940 law that set standards for investment companies. The new rules said investment advisers have a “fiduciary duty” not to charge too much—a duty that Winerman and the other plaintiffs said Harris breached by charging excessive fees.
In court papers, the investors noted that the 0.88 percent management fees Harris charged individual investors in three Oakmark funds were nearly double the 0.45 percent that pension funds and other institutional investors were billed for similar funds. “In dollar terms, the funds would have saved between $37 million and $58 million in one year alone under the fee schedules” used for Oakmark’s institutional clients, they argued.
But Harris disagreed, insisting that the fees were permissible because the three funds had performed well, and the fees were similar to those charged by other industry funds.
Since 1982, such disputes have been governed by a federal appeals court ruling that said fund advisers were only in violation of the 1970 law if their fee was “so disproportionately large that it bears no reasonable relationship to the services rendered,” and could not have resulted from a fair bargaining process—a standard that has proven nearly impossible for disgruntled investors to meet.
The Seventh Circuit seemed to add to that burden by ruling that the investors needed to show that the advisers—in this case, Harris—misled the fund’s board directors who approved the fees. The Supreme Court, in its unanimous decision last week, rejected the Seventh Circuit ruling. But the opinion, written by Justice Samuel Alito, kept in place the industry-friendly 1982 standard.
A partial win for both sides
The mutual fund industry called the ruling a victory. Paul Schott Stevens, president and CEO of the Investment Company Institute, says that by maintaining the existing standard, the Supreme Court’s decision “brings stability and certainty for mutual funds, their directors, and almost 90 million investors.”
But advocates for investors also saw good news in the decision. James C. Bradley, an attorney for Winerman, notes that the opinion specifically clarified that courts may consider the discrepancy between fees charged to individual investors and those charged to institutional clients when evaluating whether fees are excessive—a comparison that the mutual fund industry had hoped to avoid. That gives investors a new tool that could make it easier to challenge mutual fund fees.
A lower court will now rehear Jones v. Harris, and Winerman’s team plans to use that clarification from the Supreme Court ruling to bolster its case.