Recent mutual funds-related litigation has involved allegations of excessive advisory fees and conflicts of interest among fund managers. Mutual funds fees were key in the settlement reached between the New York State Attorney General and Alliance Capital Management in December 2004, in which Alliance agreed to reduce its management fees by 20 percent for the next five years and disclose publicly how it sets fees. As a result, advisory fees—which constitute the largest portion of expenses—are now subjected to additional disclosures regarding the determination of fees.

In this working paper, NERA Senior Vice President Dr. Denise Martin, Vice President Dr. Faten Sabry, and former Consultant Dr. Winai Wongsurawat examine trends in mutual funds’ advisory fees using a database compiled from public filings of mutual funds. The authors demonstrate how advisory fees differ with the investment style of the fund, the fund’s size, the type of advisory contracts, incentive structures, risk, fund family affiliation, and performance. They conclude that advisory fees tend to be higher for small funds and funds that concentrate on short-term, high-risk investment, while contracts with advisors that manage large amounts of assets or that link fees to relative peer performance are likely to involve lower fees. The authors also note that advisory fee contracts with breakpoints are associated with lower overall fees for some types of funds, but not for others.