22 May 2022

Suit Raises Questions About Fees on Subadvised Funds

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Source: Investment News

Suing to prove that a mutual fund charges small investors excessive fees is often an exercise in futility.

For 30 years, the courts have set the bar so high for plaintiffs in such cases that most suits are dismissed before they get to trial.

According to a 1982 legal precedent known as the Gartenberg Standard, the courts will deem a fund's management fee excessive only if it is “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining.”

Proving that has been impossible, partly because it is difficult to isolate management fees that cover the crucial work of picking stocks and bonds from costs associated with mundane administration.

Until now.

In December, U.S. District Court Judge Renee Marie Bumb in Newark, N.J., allowed a case known as Kasilag et al. v. Hartford Investment Financial Services LLC to proceed, denying Hartford's motion to dismiss. Jennifer Kasilag is one of six plaintiffs who invested in Hartford funds.

The reason for the decision has everything to do with the type of mutual funds the plaintiffs chose to attack.


Rather than go after, say, Fidelity Investments, which manages funds in-house and bundles most of its costs in its management fees, Ms. Kasilag's lawyers targeted Hartford's subadvised funds, run primarily by external manager Wellington Management Co. LLC. Because the fees Hartford pays Wellington to pick stocks are specified in public documents and separate from fees for other services, they provide a level of transparency that can better indicate whether the total management fee is too high.

Part of the trouble with previous shareholder suits was that plaintiffs would compare a mutual fund's management fees with those of pension plans, arguing that the latter pay a fraction of the cost. Defendants would respond that it was an apples-to-oranges comparison, as mutual funds have additional administrative, advisory and legal costs from handling multiple shareholder accounts baked into their management fees.

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