Professor William Birdthistle at Chicago-Kent College of Law is publishing his new book, Empire of the Fund with Oxford University Press.  A brief introductory video for the book (available here) demonstrates both Professor Birdthistle’s charming accent and talent for video productions (this is obviously not his first video rodeo). Professor Birdthistle has generously provided our readers with a window into the book’s thesis and highlights some of its lessons.  I’ll run a second feature next week focusing on the process of writing a book—an aspiration/current project for many of us.

Empire of the Fund is segmented into four digestible parts:  anatomy of a fund describing the history and function of mutual funds, diseases & disorders addressing fees, trading practices and disclosures, alternative remedies introducing readers to ETFs, target date funds and other savings vehicles, and cures where Birdthistle highlights his proposals. For the discussion of the Jones v. Harris case alone, I think I will assign this book to my corporate law seminar class for our “book club”.  As other reviewers have noted, the book is funny and highly readable, especially as it sneaks in financial literacy.  And now, from Professor Birdthistle:

Things that the audience might learn:

The SEC does practically zero enforcement on fees.  [pp. 215-216]  Even though every expert understands the importance of fees on mutual fund investing, the SEC has brought just one or only two cases in its entire history against advisors charging excessive fees.  Section 36(b) gives the SEC and private plaintiffs a cause of action, but the SEC has basically ignored it; even prompting Justice Scalia to ask why during oral arguments in Jones v. Harris?  Private plaintiffs, on the other hand, bring cases against the wrong defendants (big funds with deep pockets but relatively reasonable fees).  So I urge the SEC to bring one of these cases to police the outer bounds of stratospheric fund fees.

The only justification for 12b-1 fees has been debunked.  [pp. 81-83]  Most investors don’t know much about 12b-1 fees and are surprised by the notion that they should be paying to advertise funds in which they already invest to future possible investors.  The industry’s response is that spending 12b-1 fees will bring in more investors and thus lead to greater savings for all investors via economies of scale.  The SEC’s own financial economist, however, studied these claims and found (surprisingly unequivocally for a government official) that, yes, 12b-1 fees certainly are effective at bringing in new investment but, no, funds do not then pass along any savings to the funds’ investors.  I sketch this out in a dialogue on page 81 between a pair of imaginary nightclub denizens.

Target-date funds are more dangerous than most people realize.  [pp. 172-174]  Target-date funds are embraced by many as a panacea to our investing problem and have been extremely successful as such.  But I point out some serious drawbacks with them.  First, they are in large part an end-of-days solution in which we essentially give up on trying to educate investors and encourage them simply to set and forget their investments; that’s a path to lowering financial literacy, not raising it (which may be a particularly acute issue if my second objection materializes).  Second, TDFs rely entirely on the assumption that the bond market is the safety to which all investors should move as they age; but if we’re heading for a historic bear market on bonds (as several intelligent and serious analysts have posited), we’ll be in very large danger with a somnolent investing population