Nov. 2 (Bloomberg) -- John Bogle helped create a mutual- fund industry that has grown to $10 trillion in assets. Now the Vanguard Group Inc. founder is backing investors asking the U.S. Supreme Court to limit the fees charged by fund managers.

The justices today hear arguments on the ability of investors to sue portfolio managers, using a case involving Harris Associates LP’s Oakmark mutual funds. A ruling in favor of the investors might lead to reductions in the $90 billion in fees reaped by fund managers each year.

The dispute pits the fund industry against trial lawyers, consumer-rights groups and Bogle, an industry pioneer who started Vanguard in 1974. Bogle, who filed a brief supporting the Oakmark investors, says mutual fund shareholders are being overcharged with fees that seem low when expressed as percentages yet add up to a multibillion-dollar windfall for advisers.

“Individual investors have suffered from this ability of something to look like a low rate, but in fact it is enormous in terms of dollars,” Bogle said in an interview.

The industry’s trade association, the Washington-based Investment Company Institute, says the case may produce the most important Supreme Court ruling in the history of the business, changing the legal standard governing fees and inviting new investor suits. The industry has grown 200-fold since 1969, when it had $50 billion in assets.

Growth has brought steady reductions in the management fees paid by investors, says Paul Schott Stevens, the trade group’s president. Average fees for stock funds have fallen to 0.99 percent in 2008 from 2.32 percent in 1980, the group says.

Cost Reductions

“It’s very clear that over the past 25 or 30 years, the cost of fund investing has gone down,” Stevens said in an interview.

At issue is how to determine whether those fees are still too large. The court case turns on the Investment Company Act, which protects investors from close relationships between fund managers, also known as investment advisers, and their fund directors. An adviser, such as Harris Associates, typically sets up the fund and often selects some of the directors, who are responsible for approving the adviser’s fees.

Since it was amended in 1970, the Investment Company Act has addressed that conflict of interest by imposing on advisers “a fiduciary duty with respect to the receipt of compensation for services.”

Three Oakmark customers say that, in determining whether an adviser has met that standard, judges should compare mutual fund fees with those the same firm charges institutional clients.

Twice as High

The shareholders say fees on the three funds -- -- Oakmark, Oakmark Equity and Income and Oakmark Global -- are in percentage terms more than twice what Harris charges pension funds and other independent clients. For the Oakmark Fund, Harris charged 0.88 percent during the 12 months before the suit was filed in August 2004, court documents show.

Investors in the Oakmark Fund paid $55 million in fees during that period, compared with $720,000 paid by an unspecified institutional client.

“The disparity in the actual amounts paid by the two sets of clients is striking,” the shareholders said in court papers.

Harris says the comparison is inapt because retail funds require governing boards, prospectuses, annual reports and administrative spending. The firm also says its three funds had near-median fees, even as they outperformed the vast majority of their peers in the years leading up to the lawsuit.

Best in Class

“Despite best-in-class performance, fund shareholders paid management fees and expenses that were unremarkable,” Harris argued. Chicago-based Harris had $47.8 billion under management as of Sept. 30, according to its Web site. The firm is owned in part by Paris-based Natixis.

A federal appeals court in Chicago ruled in Harris’s favor.

Related to the legal fight is a debate over how well the market is working in the mutual fund business. Stevens says investors can and do insist on lower fees.

“If they’re unhappy about the performance or the service or the fee of any given fund, there are lots of others out there that are competing vigorously for their business,” he said.

Bogle says the experience of Vanguard, the country’s largest manager of stock and bond mutual funds, shows that isn’t the case.

Unlike other companies, Vanguard, based in Valley Forge, Pennsylvania, keeps its funds independent of their investment advisers. While a 2008 study found advisory fees for actively managed Vanguard funds were less than a quarter of those at the 500 largest non-Vanguard equity funds, Bogle says that hasn’t driven down fees industrywide to the extent he had hoped.

“There is no question that funds are not competitive with one another,” he said. “They don’t reduce fees because someone else reduced fees. That happens very, very rarely.”

Bogle, 80, retired as Vanguard’s chief executive officer and chairman in 1996 and is now president of its Bogle Financial Markets Research Center. Stevens declined to comment on Bogle’s criticism of the industry in the case.

The court will rule by July in the case, Jones v. Harris Associates, 08-586.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: November 2, 2009 00:01 EST