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High Court Hears Mutual Fund Case

The Supreme Court has begun hearing arguments on an important case involving high mutual fund fees.



) -- The U.S. Supreme Court begins hearing arguments Monday in a mutual fund case that could profoundly affect investors and the industry.

A group of investors has sued mutual fund advisors Harris Associates, alleging that the group charged mutual fund investors more than twice the amount of fees as it did non-fund clients for the same investment strategies. The funds in question are


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, Oakmark Equity and Income and Oakmark Global.

This latest chapter in mutual fund regulation follows in the footsteps of the landmark Gartenberg v. Merrill Lynch case in 1982. As a result of that case, the U.S. Second Circuit Court of Appeals instructed courts to consider claims against an investment manager's fee in light of a various factors, including the approval of independent directors.

There have been several important developments in the mutual fund industry, however, since 1982. According to the Investment Company Institute, the mutual fund trade association, mutual-fund fees have dropped 63% for bond funds and 57% for equity funds since 1980. ETFs have also presented a significant challenge to traditional mutual funds with low-expense ratios and passive-indexing strategies.

The arguments heard today before the Supreme Court should be of interest to anyone invested in mutual funds. While 401ks have suffered significant losses in the wake of the global economic slowdown, it is still a trillion-dollar pool of assets, and a significant portion of those assets are invested in mutual funds.

Some 401k plans do not offer many mutual fund selections, driving investors to pay whatever fee is demanded for the strategy that suits their needs. Even when competition is present, industry insiders like John Bogle claim that fees remain unreasonably high. In a recent interview Bogle noted that, "individual investors have suffered from this ability of something to look like a low rate, but in fact it is enormous in terms of dollars."


has taken great strides in the mutual fund and ETF industries to garner investor interest and market share with low-cost products. The

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mutual fund has an expense ratio of just 0.18%.

Passively indexed ETFs have also challenged the dominance of mutual funds by offering popular index strategies at lower costs. The


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, the largest ETF, has a gross expense ratio of just 0.10%.

While Jones v. Harris will certainly cause investors and institutions to reconsider the way they view mutual-fund fees, it may not be the most effective way to mitigate the problem of high-cost funds. Increased regulation cannot take the place of competition and investor education and awareness.

Ideally, 401k and other investors could compare similar fund strategies and pick the most appropriate for their portfolios. Often, this decision may come down to cost, but it will also hinge on factors like size and management.

Both mutual funds and ETFs as well as active and passive strategies have a role in the investment universe. Investors must assume the role of selecting the most appropriate asset management strategy to suit their objectives. Hopefully news of the case before the Supreme Court today will encourage investors to look into their mutual fund holdings and examine the competition.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion had no positions in any of the funds mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.