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No Easy Fix to Disclosure Dilemma: Push Out Legal, Call In Marketing, One Expert Says


WASHINGTON - The money management industry is wrestling with a titanic disclosure dilemma.

As mutual funds continue to undo the damage of the scandal, they've identified improving the format of disclosure documents, as well as leveraging the Internet as a new delivery resource, as a way to keep investors better informed when it comes to key factors like fees, risk, past performance and measures to prevent market timing.

But as a panel of experts observed during the 48th annual Investment Company Institute General Membership Meeting, held here recently, the industry might be struggling with the perfect disclosure document because it's trying to fashion a one-size-fits-all solution for a customer group that these days varies tremendously in age, education, time pressures and any number of personal preferences.

Besides, trying to get an investor to read the small print contained in a prospectus or some other sort of disclosure document is sometimes tantamount to convincing a child to eat their vegetables.

"We're trying to design a document for this mythical average investor, when there is no average investor," said Elizabeth Gooding, chief executive officer of Art Plus Technology, a shareholder communications company in Boston.

Ironically, while they're more difficult than ever to neatly categorize, fund investors as a broad consumer group are hunting for information like never before, new research indicates. According to the ICI, investors typically consider nine pieces of information about a fund before purchasing shares. That's up from six items in a 1996 survey. Close to three-quarters of investors in the current study said they chiefly wanted to know about fees and expenses before writing a check, while more than two-thirds sought historical performance data. More than half looked at risk, the fund's price per share, the types of securities the fund holds, minimum investment requirements and the fund's performance against an index.

Bill Doyle, vice president of Forrester Research, an independent market research firm in Cambridge, Mass., said his research also indicates that today's investors are more intelligent, more insightful and possess a clearer sense of exactly what they're seeking than they did just a few years ago.

"People are more attentive than ever to their own interests and making sure they're not taken advantage of," Doyle said. "They want to be reassured that their interests are in front of the fund company's bottom line."

That's much different than a decade ago, Doyle observed, when basically two types of investors existed. The first was a "soloist" who conducted their own research and perhaps even their own buying and selling, while the second was a "delegator" who turned all decision making over to a financial adviser. Today, a hybrid investor has evolved. Doyle calls them "validators," or investors who use information from an outside source to reassure themselves that they've made a smart decision.

Investors might want to know more about fees and expenses, Gooding added, but in her experience they're not terribly knowledgeable about equally important data. For example, she cited a friend who wanted to buy a socially responsible fund. That person did the due diligence and found the fund that fit their investment objective, but was confused when they had to choose between share classes and loads.

"People really struggle with that," Gooding said. "It's not just the fee. They also have difficulty understanding which fee applies to them."

These two factors - complex information that even today's savvy investor fails to grasp and an investor who is willing to add professional advice to their decision making - would seem to support the argument for a point-of-sale disclosure document, said Paul Schott Stevens, president of ICI.

"Maybe we should think of a different way to serve investors their vegetables, so they can still get the vitamins they need," Stevens offered, reiterating a sentiment expressed earlier at the conference by Robert Glauber, chairman and CEO of the NASD.

Further disconcerting is ICI data that indicates just one-quarter of recent investors wanted to learn about the fund's stock pickers. And in what would seem a validation of the Securities and Exchange Commission's effort to pass an independent director rule to fortify investors against decisions that aren't shareholder-friendly, the ICI found that only 15% of their study's participants considered information about a fund's board before buying.

The same percentage of investors sought information on the fund's proxy voting policies prior to their purchase.

That's a clear sign, Gooding said, that investors aren't drilling too deeply into the fund prospectus. And as far as using prospectuses to make side-by-side comparisons, forget it, she said.

"It's like trying to plan your vacation by using a set of encyclopedia," she said. "It's just not useful for the situation that you're in."