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Excessive Fee Case Against RiverSource Makes Headway

Plus, American axes B shares, an iShares deal is reached, and more.

Morningstar Analysts, 04/13/2009

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

News that RiverSource was laying off multiple employees was not the worst news for the fund family this week. On Wednesday, the Eighth Circuit Court of Appeals said the shareholders of 11 RiverSource funds (including RiverSource Large Cap Equity ALEAX, RiverSource Mid Cap Value AMVAX, and RiverSource Mid Cap Growth INVPX) could sue the fund family's advisor in a lower court for charging excessive fees.

RiverSource fund owners had sued RiverSource funds' advisor, Ameriprise Financial AMP, for breaching its fiduciary duty by charging higher fees on mutual funds than they did for similar institutional accounts. The suit initially lost in federal district court, but the appellate court's ruling to reverse that lower court's decision gives the suit another shot.

The argument is similar to one at the center of a lawsuit against Oakmark Funds advisor Harris Associates that is headed to the U.S. Supreme Court.

In its case, Ameriprise defended its fees by contending an advisor cannot be liable for a breach of fiduciary duty as long as its fees are roughly in line with industry norms. This has been the fund industry's common defense against excessive fee lawsuits in past years and one that the district court accepted. The appeals court, however, wrote that the district court "erred in rejecting a comparison between the fees charged to Ameriprise's institutional clients and its mutual fund clients."

"Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts," the appeals court wrote.

Moreover, the appeals court wrote in its opinion that there was evidence Ameriprise was well aware the fee discrepancies between its retail and institutional accounts could be questionable.

"At some point during the [mutual fund] fee negotiation, the [RiverSource] Board became aware of the comparatively lower fees Ameriprise charged its institutional clients and requested a report explaining the similarities and differences between the two types of accounts," the appeals judges wrote. "Even before the Board's request, there is some indication that Ameriprise knew that a fee discrepancy between institutional accounts and mutual funds might concern the Board. In response to a Wall Street Journal article that discussed the industry-wide disparity in fees, an internal email noted that 'this could come up in a Board meeting' and suggested that 'we should have a reply, though it may or may not be convincing.'"

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