Federal Court Demands More Scrutiny of Adviser/Sub-Adviser Fees
The U.S. District Court for the District of New Jersey has ruled that a court examining fund fees where the fund sponsor employs a sub-adviser must consider the split of advisory fees and as well as the fees paid to others using the same sub-adviser. The plaintiff argued that the adviser retained three times the amount paid to the sub-advisers even though the sub-advisory services “constitute the most expensive and important services.” Acknowledging that the adviser also provided other administrative services, the Court stated that the plaintiffs at least raised a “plausible inference” that the adviser’s fees are excessive. The Court also gave weight to plaintiff’s argument that a Court must consider adviser fees received by Vanguard, which utilized the same sub-adviser. The plaintiff asserted that the defendant received three times the management fees but provided fewer services. Because both products used the same sub-adviser, a comparison with the Vanguard product was warranted. The Court also questioned whether the nine board members could properly supervise 85 funds: “It is unclear to this Court, however, whether such conduct is customary in mutual funds, given their inherently incestuous structure.”
OUR TAKE: This opinion does not follow the Jones or Gartenberg cases, which give substantial deference to Board decisions. Also, we are not sure why the split of advisory fees is relevant to shareholders and where this factor arises either in the statute or the case law. Additionally, does this decision mean that all sub-advisers must give the same fee structure to every fund manager? Regardless, boards have more work to do when reviewing adviser/sub-adviser fee structures.