Gartenberg Standard

Articles by Fund Democracy: Archives

What's An Excessive Fee? Courts Leave it to Funds to Decide, TheStreet.com (Jan. 24, 2001)

(See related article, No Matter How You Slice Them, Mutual Fund Fees Should be Lower, TheStreet.com (Jan. 23, 2001)(article abstract))

Abstract: Imagine you're on your deathbed, worried about whether the family trust you created will adequately provide for your spouse and your 12 children after you are gone. Your trustee proposes to add this provision about his fee to the trust:

To be found excessive, the trustee's fee must be 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.

Would you agree to these vague terms?

I wouldn't, and neither would anyone in a group of about 50 fund-industry executives who were asked the same question at a recent conference. What the executives might not have known, however, is that this is the legal standard used to determine whether a mutual fund adviser's fee is excessive.

The fund industry successfully lobbied for this standard in the 1960s, but times have changed, and the political environment may be ripe to raise the bar for directors when negotiating advisory contracts.

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