For the last couple of weeks, we've been having a huge national debate over what to pay people.
Ken Feinberg, the Treasury's Special Master, has weighed in on bailed -out banks. The Federal Reserve is getting into the act, asking banks to explain the relation between pay practices and risk.
Today it was the Supreme Court's turn to dip a toe into the national discussion.
The case at hand is Jones v Harris Associates. Jones and two other plaintiffs are individual investors. Harris Associates is the sponsor of the Oakmark Funds and the investment adviser, a common feature of the mutual fund industry. To manage the conflict of interest between the adviser and the fund it operates, the law requires compensation be set by an independent board of trustees representing the fund.
The shareholders in this case argue Harris' fees are excessive because they are twice as high as those charged to institutions for virtually identical advice. Harris -- and the mutual fund industry -- argue the advice and services are very different, justifying the higher fees.
Also, the industry argues an independent board knows better than a court whether an investment fee is excessive or not.
On the flip side, advocates for investors cite evidence showing that most of us don't really make rational decisions about mutual fund fees. In other words, the market is not a sufficient check on the industry.
In oral arguments today, the justices of the Supreme Court seemed uncomfortable with the idea of judges setting pay for an entire industry. They also wrestled with the right "fiduciary responsibility" standard for the industry.
Fiduciary is a word every investor should understand. In lay terms, it means the person you are dealing with -- your fiduciary -- should act in your best interests. That is a very different standard than, say, a salesman who might just have to follow a law against fraud.
We'll find out more about what the proper fiduciary standard is for the mutual fund industry when the Supreme Court issues its ruling sometime next year.
