Mutual fund fees, politicians, lawyers and markers
What gives you good money management deals – lawsuits or competition?
Some of the fees collected by fund managers are outrageous. Investors need protection. Who will guard us against the wolves of Wall Street?
Saviors fall into three categories: politicians, lawyers, and what I will call markers. I will take everyone’s contributions into account. The second group is coming off a big victory at the Supreme Court: an 8-0 decision in Hughes v. Northwestern University.
I do not applaud what the high court has done. I prefer the last category of defenders, although you can ignore my reasoning because I have an ax to grind.
We could have the government protect consumers from high prices by decree. Emperor Diocletian had price edicts. The United States controlled prices during World War II and again under President Nixon. Until a few decades ago, air fares and freight rates were overseen by bureaucrats.
Hugo Chavez shielded Venezuelans from grocery prices. In New York, price regulations dictate apartment rents. Elizabeth Warren, if she had the power, would do the same for the pricing of all financial services.
Do I like this approach? Only when it suits me. I live in an area served by only one internet service provider and would greatly appreciate a state law cracking down on its rates. But most of the time, in most places, price controls do not improve the welfare of citizens.
There is an important difference between the internet service and the mutual fund industry. The first is often a monopoly. The latter is not. There are 6,900 funds competing for your dollars.
The Investment Company Act of 1940 puts in place an elaborate mechanism to keep mutual fund fees in line. Each fund must have an “independent” board that negotiates with the company selling the fund. Along the same lines, the Employee Retirement Income Security Act of 1974 imposes a fiduciary duty on employers to get good deals on funds that finance pensions.
And this is how cost equity disputes pay for many yachts. The Northwestern case concerns whether the university breached its fiduciary duty by including overpriced funds on its defined contribution plan menu alongside fairly priced ones. Monday’s unanimous decision allows the litigation to continue.
Some academics prefer lawsuits as a way to keep fees low. For Florida State University’s Stewart L. Brown, it’s become an obsession. (here is one of his papers.)
But consumers are doing pretty well without platonic tutors. You cannot elect a board of trustees to determine the price of eggs at Walmart. If you don’t like the price, you shop across the street.
These so-called independent boards setting fund fees have turned into rubber stamps. But they are not free. Neither do court cases. Prices for financial services end up being the sum of two figures: what they would be in the absence of fiduciary litigation plus what it takes to pay lawyers. Congress could save investors money by ending the farce of independent boards. Repealing most of Erisa would also help.
This category includes Morningstar, which lets you search for cheap funds, and, ahem, Forbes Media. Forbes has been drawing attention to the spending of funds for half a century. My most recent The reader asks column is of the opinion that you should be wary of any fund that costs more than 0.1% of assets per year; I frequently publish Best Buy rankings of mutual funds and exchange-traded funds, such as this one. Guide to international investing.
Critics of cost experts and the marketing skills of Vanguard founder John Bogle have combined to make the price war a prominent feature of the money management industry. Indeed, Fidelity now has index funds at 0% fees. The politicians didn’t do this for you, and neither did the lawyers.