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  • Writer's pictureBob Brooks

Getting Sued For Not Charging High Fees?

This article appeared on a popular financial planning site – take a look at this snippet:

"Retirement advisors have long known they can be

damned to litigation misery if they steer investors

into higher-fee managed funds, even if they do so

while adhering to their fiduciary duties.

Now they're learning they can be damned if they

don't — that is, if they don't recommend high-fee

funds and instead go for low-fee alternatives that

promise less risk but perhaps smaller returns over time. 

Plaintiffs' lawyers have begun promoting the novel

idea that retirement fiduciaries should be legally

liable when those low-fee funds turn out not

to perform as well as other investments

that were on offer."

Now, let me add some background. It is very simple. Low-expensed mutual funds have minimal to no investment strategy. They tend to be index funds that follow the market. If the market goes up, they go up. If the market goes down, they go down.

Higher expensed mutual funds come in one of two types. First, they are mutual funds that are trying to beat the market. If that is your objective, invest in index funds that mimic the market because very few mutual fund managers beat the market. Second, there is this other category of higher expensed mutual funds that have a strategy for risk. They are designed to grow and protect. Sure they will not reap the bigger returns as the low-expensed index-type funds. However, they are also less likely to lose large sums of money in market downturns.

Just a few observations:

  1. It is refreshing to see the fee argument give some credibility to higher expense-managed mutual funds. Not everyone wants to take 100% market risk, low fees or not.

  2. During the bull market, these attorneys won't find anyone complaining about fees and market returns in the last few years. It is only when we are in a bear market (in 2022) that they have all of a sudden "been harmed. "

  3. Finally, there is no such thing as a "low fee" fund that has less risk and smaller returns. Of course, I guess it also comes down to the question – what qualifies as a high/low fee?

The bigger irony is that you won't find these higher expensed managed mutual funds in 401 K plans because the company 401 k sponsors are too scared of getting sued for offering funds that are underperforming.

Just like everything else in life – you get what you pay for in most cases!


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