The original impetus for this research was provided several years ago by
a request to assist Counsel for Fidelity Management and Research
Corporation in analyzing the mutual fund industry, with particular
emphasis on money market mutual funds. We were asked to focus our
efforts on the mechanism by which the advisory fees of mutual funds are
determined. This request arose out of litigation that challenged the
level of advisory fees charged to the shareholders of the Fidelity Cash
Reserve Fund. Subsequently, we were asked to provide similar assistance
to Counsel for T. Rowe Price Associates regarding the fees charged to
shareholders of their Prime Reserve Fund. 1940, advisers of Under the
Investment Company Act of mutual funds have a fiduciary duty with
respect to the level of fees they may charge a fund's shareholders.
Since the passage of the Investment Company Act, there have been
numerous lawsuits brought by shareholders alleging that advisory fees
were excessive. In these lawsuits, the courts have failed to provide a
set of standards for determining when such fees are excessive. Instead,
they have relied on arbitrary and frequently ill-defined criteria for
jUdging the reasonableness of fees. This failure to apply economic-based
tests for evaluating the fee structure of mutual funds provided the
motivation for the present book, which undertakes a comprehensive
analysis of the economics of the mutual fund industry.