Why Are Mutual Fund Fees So High? This Billionaire Knows

Mr. Baron’s mutual funds charge some of the higher investment fees around, and the fees have held steady despite a $1 trillion exodus out of old-school mutual funds into cheaper, better performing rivals that track a variety of indexes and investment styles.

In a global economy where competition and Amazonian price destruction have forced companies to cater to cost-wary customers, the mutual fund industry is a rare outlier. Fees on most actively managed mutual funds, which house the retirement savings and other assets of millions of Americans, have barely budged.

The reasons for that — quiescent mutual fund boards, complacent investors and a general unwillingness to call a halt to one of the great gravy trains in financial history — are all visible inside Mr. Baron’s fund family.

.. An old-fashioned stock picker, Mr. Baron achieved renown in the 1990s and the 2000s for successfully betting on small companies.

.. Mr. Baron, 74, is perhaps best known for his annual investment conference, now held at the Metropolitan Opera House at New York’s Lincoln Center and in its 26th year. Mixing rock stars, pop entertainment (Barbra Streisand and Paul McCartney have performed in the past), patriotism (this year celebrated the 100th anniversary of President John F. Kennedy’s birth) and triumphant chief executives, the gala is a giddy ode to American capitalism

.. Mr. Baron is unapologetic about the high fees. He argues that his skills and experience — and the arduous task of researching small growth companies — justify the fees.

.. “Since inception, 98 percent of our funds have beaten their benchmark,” he said in an interview. “If you want the lowest fee, you should not invest with us.”

.. But if you want to bet on American growth stocks, “you can double your money in 10 years,” he said. He frequently sticks with his top picks for decades.

.. Mr. Baron believes that the true measure of his success is performance since his fund’s launch in 1994.

.. Industry experts say there are several reasons that active mutual fund fees have not succumbed to broader pricing trends in the economy.

.. The first is their power. While more than $1 trillion has left higher-fee funds in favor of passive competitors, that still leaves some $10 trillion. That generates about $100 billion in fees for fund companies. And it suggests they don’t need to cut fees to retain assets.

.. With funds’ multiple share classes, varying structures and oceans of boilerplate, even sophisticated investors may not realize they are paying up for a laggard.

.. allege that trustees are not pushing hard enough for lower fees.

.. At the Baron fund family, the fee oversight is complicated by the fact that Mr. Baron, the largest shareholder in the investment company and the manager of its largest fund, has a financial incentive to keep fees high.

.. “Compensation based on fees is worrisome,”

.. “Kicking and scratching is unlikely to lower fees but certainly will antagonize the manager, which is the one institution that can arrange for the trustees’ dismissal. Besides, trustees will tell themselves, if a fund’s fees really are too high, the market will sort things out and investors simply won’t invest in the fund.”

.. In 1982, after a stint as a Wall Street analyst, he founded his investment firm.

His timing was perfect. It was the start of a bull market, and he developed an expertise in picking small companies that would grow into big ones such as Charles Schwab, Vail Management Company and Tesla.

.. It was the heyday of the individual stock picker. Peter Lynch at Fidelity and Bill Miller at Legg Mason gained cultlike followings

.. his annual investor gala, which he pays for himself, that defines him. Onstage, he cultivates a grandfatherly mien, bragging about how much money the chief executives of his portfolio companies made for Baron shareholders. His chief maxim is “We invest in people,” and he treats management as family.

.. he offered to connect her with his longtime tax lawyer. “It’s incredible what he has done,” Mr. Baron said