Mutual Fund Fees Get Their Day in Court
Why fund directors are box-checkers rather than leaders.
Recently, I wrote a Kiplinger's column about the mutual fund fee case before the Supreme Court. You can read it below, but first I want to share the comments from a judge who ruled in a separate fee case against American Funds. American won the case, and as one of the lowest-cost providers in the fund world, it seems a strange target, but Judge Gary Feess made my point much better than I did. The problem is that while fund directors are charged with setting fund fees, they readily accept what the fund company recommends and then simply go through the motions of setting fees. Here's what he said:
"There is not a shred of evidence that any director asked management to identify who CRMC (Capital Research and Management Company) perceived as its competition, to provide information regarding compensation levels at those competing firms, to compare those compensation levels to compensation paid to CRMC and [American Funds Distributors] employees, or to explain why those compensation levels were necessary to attract and retain personnel or to provide services at a specified level of quality.
"Thus, although the directors were represented by counsel and were provided with detailed materials to which they and defendants can point to and say, 'see how thorough and careful we were,' the entire process seems less a true negotiation and more an elaborate exercise in checking off boxes and papering the file."
Russel Kinnel has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.