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Executive Summary

This paper examines claims that price competition in the mutual fund industry either does not exist or is too weak to prevent anticompetitive pricing by investment advisors to retail investors. These claims draw on a view of mutual fund competition tracing to the 1960s, which was not supported by economic analysis. In contrast to the 1960s view, contemporary analysis demonstrates that competition in the mutual fund industry prevents “excessive fees.” Numerous structural and performance characteristics of the mutual fund industry demonstrate that it is price competitive. Demonstrating that competition is present, and not limited by the fund-advisor governance structure, is sufficient to reject claims of “excessive fees.” These observations about the centrality of price competition from an economic perspective imply a prominent role for competition as a factor in the legal analysis of “excessive fees” in the framework of the Gartenberg decisions interpreting Section 36(b) of the Investment Company Act.

John C. Coates IV is a professor of law at Harvard University. R. Glenn Hubbard is a visiting scholar at AEI.

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