But while advisors can basically charge what they believe their services are worth, mutual fund investors can demand more clarity from their advisors as to why they may pay more than an institutional investor.
What the high court ruling accomplished was to say that advisors could price comparable services differently for different clients. But they must explain why certain accounts may warrant higher fees than others.
"The Supreme Court said you have to look at what is charged for similar services," says Ernest Young, the Alston & Bird professor at Duke University's Law School.
Young argued the original Jones v. Harris case on behalf of the petitioning investors. He notes that : "Some services may not be comparable. So necessarily, there is a difference in what you can charge. But [shareholders] can demand that you break [those charges] out."
During a recession, it's unlikely that advisors will raise prices dramatically. With investors shopping for the cheapest options and feeling justified in demanding even more services for lower fees-investment firms will not be motivated to increase service fees, experts say.
"We certainly don't expect any upward trend in feesas a result of the decision," says Rachel McTague, spokesperson for the Investment Company Institute, whose members include investment companies across the country. "In fact,since 1990, fees and expenses have come down by half," she says.
In the case, mutual fund clients claimed that they had been overcharged by Harris Associates disproportionately to what institutional separate accounts had paid. The Seventh Circuit Court of Appeals ruled that advisors could set fees as they believed necessary, provided a client voluntarily signed a contract with full disclosure and was not misled. In other words, anything the market would bear, short of actually duping a client, would be permissible.
Then, the U.S. Supreme Court, in its March decision, discarded the circuit court's reasoning. The high court unanimously said that while fees for each client could be different-they must be justified, not just agreed to by both parties, essentially upholding the Gartenberg standard.
With that legal clarification, individual mutual fund customers can now demand greater transparency in how their fees are set. However, they may still end up paying higher fees.
Still, the decision was widely considered a blessing for advisors. If the ruling has gone the other way-and said that fees had to be similar for the same service-it could have opened the floodgates to lawsuits from clients against their advisors.
Young says at least investors can now ask for more explanation before signing on that dotted line.
And for investors, that small change brings just a bit more power to those who end up paying the bill.
"That makes it a little easier for plaintiffs to make a case and get in the [legal] door," Young points out. "To the extent that a fund may be charged more than an individual investor, you'll have to ask them to break that out. Because the differences are huge."
