A $200 MILLION OPPORTUNITY IN WORDS PERFECT — BIG BUSINESS: WRITING SO YOU CAN READ IT

Mutual fund companies are finding out that learning plain English isn’t easy. It ain’t cheap, either.

Heeding the Securities and Exchange Commission’s recent call for “reader-friendly” mutual-fund prospectuses, fund groups are scrambling for outside lawyers, accountants, writers, marketing gurus and graphic designers. One firm even has hired a so-called “readability expert.”

The industry’s one-time bill for ridding prospectuses of verbiage and legalese by Dec. 1, 1999, may pass $200 million. That’s on top of the $175 million U.S. fund companies spend annually to produce the treatises.

“This is a brave new world for a lot of fund companies,” says Bill Benintende, vice president of corporate communications and a member of the prospectus task force at Boston-based John Hancock Funds. “A lot of fund companies may find they don’t have the expertise to tackle a project like this completely in-house.”

John Hancock, which has 31 open-end mutual funds, spent close to $1 million to be among the first fund groups to make its prospectuses more readable. In July 1996, the firm unveiled its first simplified prospectus, a point that took a team of 12 executives and outside consultants more than 10 months get to.

“Simplification doesn’t mean it’s simple,” says Joan Miller, senior vice president of retail marketing at State Street Research & Management Co. in Boston, another early bird in the push toward jargon-light prospectuses. “It took us close to 1,000 hours to come up with a prototype for our new prospectuses.”

are you reading me?

Officially, the SEC amended form N-1A, which is used by mutual fund companies to register with federal authorities. The changes are aimed at making sure investors can understand the information funds are required to give them. By Dec. 1, fund companies must use plain English prospectuses for new offerings. A year after that, existing funds must replace old prospectuses with one in plain English.

The commission als
o ruled that fund companies may issue brief three- to six-page summary prospectuses. After June 1, they can start selling shares on the basis of those prospectuses, called profiles, and companies will only have to provide an investor with a full prospectus upon sending confirmation of the investment. Among those that plan to create profile prospectuses for at least some of their funds are Fidelity Investments, Vanguard Group and T. Rowe Price Associates.

Besides helping sales by making it easier for a customer to sign on, fund companies expect the rule changes to save them millions of dollars in annual printing and mailing costs. John Hancock, for example, saw the cost of producing simplified prospectuses for its Sovereign U.S. Government Fund drop from 26 cents a copy to 21.

But it’s going to cost them initially. While no one — not even the SEC — has analyzed the costs associated with bringing current prospectuses up to snuff, most experts place the average price per fund group at $175,000 to $400,000. With 567 companies selling mutual funds in the U.S., the industry-wide tab is likely to run between $100 million and $227 million.

While fund groups such as Vanguard, Fidelity, T. Rowe Price and Putnam Investments started simplifying prospectuses on their own several years ago, most are just starting to address the issue. Even those already touting easier-to-read pros-pectuses will have to revise them to make sure they comply with the new federal guidelines.

“We’re trying to be very early out in complying with the new N-1A requirements,” says David O’Connor, senior counsel at Delaware Investments, a company in Philadelphia with 61 mutual funds holding $16.5 billion in assets under management.

The race by fund companies to meet the government’s deadlines has given birth to a cottage industry of writers, marketing experts and others who say they can teach plain English to fund groups.

Mark Hochhauser was a freelance grant writer and director of health services at a college near Minneapolis b
efore he went into the business of assessing the readability of prospectuses for fund companies. He charges from $400 and $600 for a before-and-after computer-generated evaluation of their prospectuses.

“Some fund companies have improved their prospectuses a little bit,” says Mr. Hochhauser, who holds a doctorate in psychology and has analyzed documents for State Street Research. “They are still not anywhere near as good as they should be.”

Josiah “Sy” Fisk is another who hopes to profit from the move toward simplification. As a freelance writer, Mr. Fisk was called on by Fidelity in 1992 to help simplify prospectuses. Since then, he’s done the same work for a number of firms, including John Hancock, J.P. Morgan and Dreyfus. In July, he and his partner Lynn Riddle, opened their own company, Firehouse Financial Communications, of Malden, Mass.

“Our telephone has been ringing off the hook,” Mr. Fisk says. “I had to turn down two assignments just the other day.”

living up to its name

Start-up businesses aren’t the only ones angling for a piece of the action. Wechsler Ross & Partners, a New York-based marketing and design firm specializing in financial companies, launched a subsidiary in January to help mutual fund companies redesign their prospectuses. The division is called Simplicity.

“I think prospectus work will make up 30% to 35% of our business this year,” says Charlene Haykel, the president of Simplicity, which currently works with such fund companies as Chicago’s John Nuveen & Co.

Hale & Dorr, the venerable Boston law firm, is also aggressively courting prospectus-related work. Besides holding free seminars on the N-1A amendments, the firm is preparing several marketing brochures it will send to more than 3,000 fund executives.

“It’s going to be the project of the year for every fund firm in the country,” says Pamela Wilson, a mutual fund lawyer at the firm. “We’re all gearing up to do something.”

Not everyone
is bursting with excitement over the rule changes, however. The biggest losers in the march toward reader-friendly prospectuses are printing companies. Plainer English means shorter sentences — and shorter sentences mean fewer printed pages. Some printers are already starting to feel the pinch.

“It’s going to hurt,” says Robert Collins, a senior vice president at Bowne and Co., which is based in New York. “It’s too early to say how much of an impact it’s going to have on us, but it’s not going to be good.”

A spokeswoman at New York’s R.R. Donnelley Financial, a $457-million arm of Chicago-based printing giant R.R. Donnelley & Sons, is slightly more optimistic, especially if graphic designers have a greater say in making the products less dense.

“In some cases,” she says, “the prospectuses aren’t any shorter because the companies are using a lot more white space.”