Though seemingly minor, that change is significant, says William A. Birdthistle, an associate professor at Chicago-Kent College of Law and an expert on the mutual fund industry who also filed a brief on behalf of investors in the case. “It’s still not a great place to be as a plaintiff,” he says. “But it imposes slightly more pressure on the industry to justify these fees.”
The high court’s ruling may not be the last word in the matter, Birdthistle says. He points to the last line of the opinion, which called a philosophical debate between two appeals court judges over the role of the market in setting compensation rates “a matter for Congress, not the courts.” While mutual funds have not received much attention during the current debate in Congress over changes to the financial regulatory system, Birdthistle says that opening from the Supreme Court could prompt lawmakers to take up the issue.
An unlikely ally for investors
The high court’s ruling in the case didn’t satisfy John Bogle, the feisty 80-year-old founder of the Vanguard Group, Inc., the mutual fund giant, who these days seems almost regretful about the industry he helped create. “I feel very strongly that the normal checks and balances we might think about in setting management fees have been badly violated by the mutual fund industry,” Bogle says.
Bogle complains that investors usually see their fees expressed as a tiny percentage, and he worries that they don’t realize how that number can chip away at the income their fund is generating. “If a fund is yielding two percent growth, and it’s a one percent fee, you’re consuming half in fees,” he says.
Bogle also filed a brief in the case on behalf of investors. He says he was disappointed that the justices didn’t pay more attention to the many millions of dollars in fees collected each year by top fund managers, or to the messy corporate governance issues raised by tangled relationships like those between Harris and Oakmark.
Vanguard boasts that it operates at cost, keeping its funds much less expensive than others, and its funds are independent of Vanguard’s investment advisers—setting an example that Bogle would clearly like to see the rest of the industry follow.
“I think this is an industry that provides an essential service to investors,” says Bogle. “But it could be so much better than it is.”
But investors have a role to play, too. He points to a conclusion he drew in his senior thesis, written at Princeton in 1951, which he believes remains true today: Mutual fund managers cannot beat the market. “They are the market, and they charge money!”
With that in mind, it’s up to individual investors to pay close attention to those fees. “You want to minimize your costs, you want to minimize the croupier’s take,” says Bogle. “You want to go into Las Vegas, make your bets, and get out.”
Holly Yeager lives in Washington, D.C.