Do You Get What You Pay For? A Look at the High Fees and Low Protections of Mutual Funds

Abstract

Mutual funds have become a major part of the American securities market. As of 2004, mutual funds represented $8.1 trillion in assets and held nearly a quarter of all the outstanding stock of American corporations. The value of the securities owned by mutual funds has increased almost 300% since 1995. Mutual funds have also become a primary investment vehicle for individuals, and the industry has seen astounding growth among American households. In 2004, individual shareholders held over 90% of mutual fund assets either directly or indirectly. The tremendous growth in this field, combined with the high number of individual investors, many of whom are unsophisticated, creates a serious problem for shareholders seeking fair treatment by the funds. The excessive fees that mutual funds charge shareholders is a typical form of abuse. The unique structure of mutual funds makes them particularly susceptible to agency problems that can result in higher fees. These agency problems prevent competitive forces from working properly in the mutual fund industry. Unfortunately, legislation in this arena generally has served only to increase the permissible types of fees that funds may charge, granting little in the way of increased shareholder protection. The limited protection that shareholders do receive comes primarily from the fiduciary duties created by the Investment Company Act of 1940 (the “1940 Act”). This Note seeks to determine whether current law adequately protects shareholders from the agency problems inherent in mutual fund organization by analyzing the underpinnings of mutual fund fee calculations and the available avenues for shareholders to dispute such fees.