Mutual Funds: When Investing and Gambling Are Too Close For Comfort

Tacoma, WAYou probably did not realize that investing in mutual funds was so similar to gambling until you suffered serious mutual fund losses. You were probably told that investing in mutual funds was a smart move—that they were safe and secure. Unfortunately, you learned too late that not only is investing like gambling, in some cases mutual funds are directly linked to gambling. Luckily, mutual fund ERISA laws can help you to protect your investment.

While some investors learned that their money was invested in companies involved in illegal gambling enterprises, others have filed a lawsuit alleging that they were charged excessive fees for their mutual funds. In fact, the US Supreme Court has said it will make a decision on an excessive fees lawsuit.

The question at issue is whether a plaintiff who claims that an investment advisor charged excessive fees must also prove that the advisor misled fund directors to get them to approve the fees. The judges will also review a ruling for a US appeals court that mutual fund fees should not be capped. Last year, the appeals court found, "A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation. The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth."

The appeals court also ruled that the lawsuit could not advance unless the shareholder could prove that the financial advisor misled the directors of the mutual fund. Those directors would have approved the fee in the first place.

The lawsuit was filed against Harris Associates L.P. and alleges that the company's fees were so high that they were in violation of the federal Investment Company Act. Although lower courts dismissed the lawsuit, plaintiffs argue that the fees were so high that they were not reasonable given the services rendered. Plaintiffs also claim that they were charged more for management of the mutual funds than for management of the pension funds, a third-party client.

Critics of mutual funds have argued that the fees associated with mutual funds are too high and only serve to make Wall Street richer while penalizing working Americans. They cite the difference in fees between mutual fund investors as compared to pension funds. Pension funds traditionally come with lower fees even though the managers perform the same services. Critics also say that investors in 401(k)s and retirement plans are stuck with the funds and fund managers that their employers choose—so they have no ability to walk away from funds that charge excessive fees.

While some investors argue about their mutual fund fees, others are still reeling from the news that their money was invested in companies involved in illegal activities. They say they were surprised to learn that their mutual funds were invested with companies that were apparently upfront about violating American laws. The investors say they lost a lot of money when the companies were investigated and indicted by US authorities.

These investors have filed a lawsuit against their fund managers, alleging that the managers knew or should have known about the illegal gambling activities. They say their money was put at risk by the decisions made by their fund managers and advisors. Plaintiffs are now hoping they can recover their lost money through a lawsuit.