Mutual Fund Investor Fees and Breach of Fiduciary Duty
39 Pages Posted: 2 Feb 2010 Last revised: 6 Jun 2010
Date Written: January 1, 2010
Retail mutual fund investors appear to pay higher fees than institutional investors. Critics attribute the apparent fee differential to competitive market failure among retail fund investment advisers. Several appellate court opinions have expressed support for using such fee disparities to test whether retail mutual fund investment advisers have breached their fiduciary duty to fund investors. We discuss existing theories of anti-competitive pricing in the mutual fund industry; present empirical findings consistent with price competition; and review conflicting appellate court opinions on the factors to consider when assessing whether an adviser has breached its fiduciary duty to fund investors. We then analyze the basic economics of mutual fund investor fee differentials. We find that investor fee differentials reflect important features of retail and institutional adviser supply (cost) and buyer demand, consistent with price competition in both retail and institutional fund sectors. Our analysis indicates that if courts engage in de facto mutual fund rate regulation, as fee critics implicitly call for, using institutional fees as a competitive benchmark, retail fund investors will experience higher fees, contrary to the law's intent, and institutional investors will have fewer advisers to choose from.
Keywords: mutual fund investor fees, investment advisers fiduciary duties
JEL Classification: G23, G28, L11, L88
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