Is 'Jones v. Harris Associates' a Referendum on Mutual Funds?

Myths and realities in the Supreme Court's mutual fund case

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As the Supreme Court mulls over mutual funds' fees, analysts have lined up to read between the lines. And while a decision in Jones v. Harris Associates is probably months away, there is no shortage of opinions about its implications.

On its surface, the question at the heart of the case is narrowly constructed: Should courts intervene when investors claim that asset managers' fees excessively favor certain clients? In particular, the plaintiffs are shareholders in the Oakmark funds, which are run by Harris Associates. The Oakmark shareholders say that at the time they filed the suit in 2004, they were being charged management fees nearly twice as high0.88 percent vs. 0.45 percentas those assigned to Harris's institutional clients.

Still, this veneer of simplicity hasn't prevented an outpouring of speculation as to how potential outcomes could affect the broader financial industry. With that in mind, U.S. News takes a look at three of the most common claims and examines how likely the suggested impacts are to materialize. This is the last article in a three-part series.

[See Part I: How the Supreme Court May Make Mutual Funds More Expensive and Part II: Why the Mutual Fund Case Isn't About Executive Pay.]

Claim: This case highlights the structural weaknesses of mutual funds. Disputes over mutual fund fees are hardly uncommon. Actually, the tendency of expenses to gradually erode returns is perhaps the biggest complaint that investors have about their funds. But while these discussions were previously relegated to dinner-table banter or buried in congressional bills, this case has propelled them into the national spotlight at a time when investors were already smarting from disastrous 2008 returns.

So with exchanged-traded funds and other less expensive options gaining traction in the retirement-savings market, does this controversy hold any clues to the future viability of the mutual fund industry? "I wish that were the case, but I think that so few people understand what's going on because of [funds'] lack of transparency," says Andy Rachleff, CEO of the Silicon Valley venture capital start-up kaChing, a portfolio-building website that bills itself as an alternative to mutual funds.

[See A New Way to Invest?]

While Rachleff sees Harris Associates' fees as representative of a larger problem plaguing funds, he doesn't expect investors to shift their behavior as a result of the case, nor does he believe that the Supreme Court's decision will change the industry's dynamics. "Unfortunately, I don't think it's going to make a big difference," he says.

Instead, he maintains that legislation aimed at transparency is the only solution to what he sees as funds' fatal flaws. "Mutual funds' interests are typically not aligned with those of investors. Their No. 1 goal doesn't seem to be to make money for investors. Their No. 1 goal seems to be to make money for their firms," he says. "Until those interests are aligned, we're going to continue to see these problems."

Still, others maintain that the case does not point to more general problems with funds' price structures. "Investors have an ability to move funds if they think that the fees are too high," says Adam Bold, the founder of The Mutual Fund Store, an investment management firm with more than 65 U.S. locations. "In our society, you have to be able to sell a good product at a reasonable price, or people will go elsewhere."

Ultimately, in this regard, the case cuts to the core of the controversy that has long surrounded mutual funds: Do investors understand the full scope of the fees that they pay, and if not, would such knowledge be a kiss of death for the industry?

Paul Atkins, managing director of the consulting firm Patomak Partners and a former commissioner of the Securities and Exchange Commission, says that investors really do pay attention to fees. "It's a price-sensitive marketplace, which is what you want," he says. "Investors are savvy to that. I think that they look for value and they look for convenience, and they weight that against the fees that they're charged."