Building a Tower of Babel
February 5, 2008
Learning about finance and how to manage your money is like learning a new language.
Capable investors and financial experts know what terms like annuitization, decumulation, derivative instruments and fiduciary responsibility mean, but to the rest of the world, you might as well be speaking in Ancient Greek.
The key to communication is speaking in a language that everyone understands.
With its new plain-English requirement for prospectus profiles, the Securities and Exchange Commission is taking an important step in helping the average investor understand whats happening to their life savings.
But fund companies can do more than just meet the minimum requirements.
Many of the executives to whom Ive spoken recently have stressed the importance of improving financial education among the general public. One executive I talked to last week said he gives speeches to high schools about finance during his spare time.
High school students arent required to take money management or finance courses, he said, and if they dont go into the business field, most consumers wont ever really understand how the stock market functions or the difference between stocks, bonds and mutual funds.
This executive said he has no trouble communicating with these students because he speaks in plain English at their level. Even a basic understanding of credit and interest can give people a huge advantage in life, he said.
Should schools put more emphasis on finance and business courses? Many community groups and colleges offer adult classes on finance, but the public also needs to start showing some initiative of its own by filling up these classes and taking an active interest in their finances.
Both the asset managers and the investors can work from opposite ends to bridge this communication gap.
Over the last number of years, mutual fund transfer agencies and shareholder communications companies have tried to convince shareholders to accept paperless summary prospectuses, proxies, trade confirmations and electronically stamped signatures. Fund supermarkets and web home pages have broadened their horizons to include market commentary, videostreaming and personal financial news. At the same time, exchange-traded funds, funds-of-funds, hedge FoFs, unified managed accounts, target dates, 401(k) auto enrollment and heightened awareness among people throughout the country of the difficulties of being retired-have taken off.
Fund giant boards of directors at AllianceBernstein, American Funds, Fidelity, Vanguard and others are reportedly starting to bring about meaningful change in the corporations in which they are invested. Proof should come any day now, when the shareholder proxy votes from the annual meetings are released. Fund chief executive officers spoke about the power and influence their proxies wield in an interesting Reuters article last week, "Mutual Funds Seek to Shed 'Rubber Stamp' Tag."
In 2011, 401(k) plans will turn 30, but the milestones the mutual fund industry has reached in this time are but a nanosecond in the history of U.S. retirement policy. Executives we interviewed for this special edition of Money Management Executive for the Investment Company Institute's meeting in Washington, speak to important milestones of the recent past and into the future. Look inside for observations and forecasts by Ted Benna, Robert L. Reynolds, Dan Fuss, David C. John, Steven Miyao and others.
This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off. The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at 401(k)s and how they can be fixed.
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