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Mutual Fund Advisory Fees: New Evidence and a Fair Fiduciary Duty Test

Oklahoma Law Review, Vol. 61, p. 83, 2008

72 Pages Posted: 22 Aug 2008 Last revised: 28 Aug 2008

John P. Freeman

University of South Carolina

Stewart L. Brown

Florida State University - Department of Finance

Date Written: August 20, 2008

Abstract

A recent article in the Economist called attention to the mutual fund industry's flagrantly noncompetitive fee structure, noting that fund managers earn a "staggering" profit margin of 42% on average, largely because "most fund managers do not compete on price." Despite this reality, in a recent law review article based on research financed in part by the Investment Company Institute (a lobbying organization for fund sponsors), Professors John Coates and Glenn Hubbard purport to show that mutual fund managers compete vigorously on price and that fund shareholders are not suffering from price gouging over fund fees. The authors of the present article, "Mutual Fund Advisory Fees: New Evidence and a Fair Fiduciary Duty Test," beg to differ. Fund portfolio managers tend to charge their own shareholders double what they charge for essentially identical advisory services rendered to institutional investors in the free market. This reality raises severe fiduciary duty problems that the courts and the Securities Exchange Commission have so far proven unable or unwilling to solve. This new article proposes a better way of analyzing fund managers' fee contracts, relying on free market prices as a test for fairness, rather than comparisons based on conflicted, inflated fund market pricing. A Forbes writer noted some time ago that fund managers' "worst nightmare" would result if they were required to charge their funds' shareholders (to whom fiduciary duties are indisputably owed) prices based on the much lower portfolio management fees the fund managers charge when selling basically the same portfolio advisory services to third-party institutional clients in arm's-length transactions. The authors contend that a nightmarish outcome is exactly what price-gouging fund managers deserve.

Keywords: advisory fees, Coates, Hubbard, Investment Company Institute, mutual funds, price competition, SEC

JEL Classification: G23, G24,G28, G30, G38, K22, K42, L51, M21

Suggested Citation

Freeman, John P. and Brown, Stewart L., Mutual Fund Advisory Fees: New Evidence and a Fair Fiduciary Duty Test (August 20, 2008). Oklahoma Law Review, Vol. 61, p. 83, 2008. Available at SSRN: https://ssrn.com/abstract=1242642

John P. Freeman (Contact Author)

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

Stewart L. Brown

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
(850) 576-6329 (Phone)
na (Fax)

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