Transcripts

The Supreme Court on Mutual Fund Fees

SUSIE GHARIB: The U.S. Supreme Court today took a look at a critical issue for every investor: how much money you pay your mutual fund's investment adviser. The question is: when do you know if fees are too high and what can you do about it? As Darren Gersh reports, the justices appeared uncomfortable with the idea of the courts setting pay for the nation's 8,000 mutual funds.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investment advisor Harris Associates charges individual investors in its Oakmark mutual funds twice as much as it charges pension funds and other institutional investors. Attorney David Frederick argued before the Supreme Court on behalf of three individual investors who say that's unfair.

DAVID FREDERICK, ATTORNEY FOR INVESTORS: The same manager looks at the same stocks from the same research and allocates after buying the same stocks some to the mutual fund portfolio, some to the institutional investor portfolio. But the mutual funds get charged twice as much.

GERSH: Arguing for Harris, attorney John Donovan says there is a big difference between advising a pension fund and a mutual fund. He says mutual funds are more complex and have to worry about taxes and redemptions which is why, the industry contends, it's not right to compare the two. And once courts get into the business of investment advisor pay, Donovan warns there will be a flood of litigation.

JOHN DONOVAN, ATTORNEY FOR HARRIS ASSOCIATES: If the court sides with the plaintiffs here and any plaintiff can say the fee is too high, it will turn judges into goldilocks where judges get to say that a fee is too high, too low or just right.

GERSH: Chief Justice John Roberts seemed to agree, wondering how a court would decide what's a fair fee for an investment adviser who beats the market. Roberts and other justices noted investors can also vote with their feet, dropping a fund if an adviser isn't earning his or her paycheck. The justices did not seem to think it would be a good idea to rewrite long-standing legal precedents on mutual fund pay, but they are also struggling to find the right standard to make sure investors are protected. A ruling is expected next year. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.