Gartenberg: Some Empirical Clarity

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The issue of mutual fund advisory fees has a long and contentious history. Reports by the Wharton School and the SEC in the 1960’s found that mutual fund sponsors overcharged their captive mutual funds relative to institutional clients. This led to the 1970 Amendment to the Investment Company Act which made fund sponsors fiduciaries with respect to advisory fees. The Gartenberg case established the fiduciary standard to gauge advisory fees. Freeman and Brown updated the Wharton and SEC reports and found that fund sponsors continue to overcharge mutual fund clients. This led to push back from the fund sponsor industry which sponsored research purporting to demonstrate that mutual fund markets are highly competitive and thus fund sponsors could not charge excess fees or they would be driven from the business by low fee competitors. Economic theory is clear that firms operating in competitive industries earn normal profits and normal rates of return for their owners while firms that have monopoly pricing power are able to earn economic profits and earn excess returns for their owners. This paper examines these issues in a fund sponsor context and finds that the universe of publicly traded mutual funds sponsors is extraordinarily profitable and the shareholders in mutual fund sponsoring firms earn excess rates of return over very long time periods.