On Monday the U.S. Supreme Court heard arguments in Jones v. Harris Associates, a case that deals with fund fees and whether shareholders are getting a fair shake.

The case was originally filed by three shareholders of the Oakmark Funds. Harris is investment adviser to the funds.

A ruling, which might not be announced until next June or July, could result in retail shareholders being charged lower fees. Just the opposite, argue those in favor of the status quo. A ruling in favor of the plaintiffs could unleash a torrent of costly suits that ultimately would be borne by shareholders.

Basically, the shareholders contend that they were charged unfair fees. The fees were excessive, the plaintiffs argue, because they were radically out of line with fees that the same funds charged institutional shareholders.

For the now-$3 billion Oakmark I Fund (NASDAQ:OAKMX - News), Harris charged a fee of 0.88% during the 12 months before the suit, which was filed in August 2004. That was nearly twice the 0.45% fee charged at least one institutional client.

Harris says its retail fee is based on the much higher costs of running a fund for individual investors.

The long-standing rule is that fees should result from so-called arms-length bargaining between a fund's investment adviser and its board of directors. Boards are set up to represent shareholders.

But that's not good enough, the plaintiff shareholders argue. They contend that fund boards are often too cozy with advisers. To satisfy the fiduciary duty imposed on advisers, fees must be fair, the plaintiffs say. In this case, they argue, that means comparable to what institutional investors pay.

"It is much more expensive to run a fund for a lot of retail investors than to run one for institutional clients," countered Paul Schott Stevens, president of the Investment Company Institute, an industry trade group that defends the existing rules for fees.

Apples Vs. Oranges

Institutional clients' accounts can be simpler and less costly, he said.

"In a pension account, you can be fully invested in just large-cap equities, for example, if you have that mandate from the client," Stevens said. "For retail investors, you often need more diversification. You must accept new money. You must be able to redeem shares. You have a responsibility to manage unpredictably liquid positions."

Funds for retail investors require expensive services such as 24-hour phone banks manned by representatives who can answer questions, Web sites and check-writing privileges, Stevens added.

The average retail stock or bond fund account balance in 2006 was less than $27,000. For institutional accounts, balances averaged more than $41 million.

John Bogle, the founder and retired chief executive of Vanguard Group, filed a brief supporting the Oakmark shareholder plaintiffs.

Bogle argued that fund boards are not truly independent. Fees they negotiate often are too high to be in shareholders' interests. Fees negotiated by savvy institutional clients should be the standard for retail customers' fees, he said.

If the plaintiffs prevail, it will expose the fund industry to an avalanche of nuisance suits, the Investment Company Institute asserts.

"That could -- ironically -- drive fees up as uncertainties about fund companies' existing business models multiplied," said the ICI's Stevens. "The expense and aggravation of litigation could also drive fees up. And it would drive talented managers out of the fund sector."

Stakes are high for a lot of shareholders. Funds ran about $10 trillion in assets as of 2008. Those were owned by 93 million investors.

Imposing new standards on fee-setting can require unrealistic assumptions, says the Mutual Fund Directors Forum.

It is not reasonable to expect retail shareholders to shop around for fees, for example, said Forum Executive Director Susan Wyderko. The Forum sides with Harris Associates.

Shareholders are often limited to retirement account options selected by employers, for example, Wyderko said. And they get hit with taxes after selling shares in taxable accounts.

The case is a plaintiffs' appeal of the ruling in May 2008 by the Seventh U.S. Circuit Court of Appeals.

"I don't expect a radical change in the rules," said Mercer Bullard, who earlier testified as an expert for the plaintiffs.

"The Supreme Court took the case because the Seventh Circuit got the law wrong," he said. "It is likely to simply restore a standard similar to one that has applied for decades."

Bullard, an associate professor of securities law at the University of Mississippi, was assistant chief counsel for the Securities and Exchange Commission.

Stock fund fees fell to 0.99% on average in 2008 from 2.32% in 1980, the ICI says. Bond fund fees declined to 0.75% from 2.05% in 1980.