Sometimes less is more, and that may be the case with mutual fund prospectuses.
Almost no one reads the multipage prospectuses that mutual fund companies now are required to print and mail to investors at significant cost.
Even many advisers don’t read them, according to some surveys — they “skim” them — unless they are ready to commit client money to specific funds. Case and point: 85.7% of those polled by InvestmentNews last week were in favor of the two-page prospectus. (See Page 2 for poll results.)
The major problem with any prospectus often is its daunting size and page after page of type. A second, and less acknowledged, problem is the shortened attention span of most investors.
With all the time-consuming distractions of modern life — intense workdays, commuting, television, the Internet, etc. — investors are loath to spend precious time wading through multipage prospectuses. They want information in brief, easily digested morsels.
Anything that appears to require time to plow through and digest will be ignored, especially if it is something they are afraid they won’t understand.
Let’s face it: such investment terms as small-cap growth, large-cap value, mid-cap blend, beta, diversification, etc., are not intuitive for the average person.
Investors might, however, be induced to read a brief, two-page prospectus that provides them with such essential information as the fund’s investment strategy and its fee structure, including any applicable loads, and 12(b)-1 and management fees. The prospectus also could include the fund’s five-year performance record, its appetite for risk, a list of the top holdings, investment minimums and the name and address of the fund’s adviser.
That way, investors would learn at least the minimum information they should know before they plunge into a mutual fund investment. Or what they read might stimulate them to ask questions of an investment adviser.
For that reason, the Securities and Exchange Commission’s initiative to allow funds to mail shorter prospectuses in lieu of the full prospectuses, without also mailing full prospectuses, is welcome.
In addition, the brief, summary prospectuses would save the fund companies millions of dollars they now spend sending out the full prospectuses that wind up in garbage cans unread.
Finally, millions of investors have become accustomed to getting news and information online. The vast majority of those who want the more detailed information in the prospectuses would be able to access it via the web.
A previous effort at distributing short prospectuses stalled in part because the SEC required that full prospectuses also be mailed.
Now the SEC can safely require that the full prospectuses be made available online in printable form for those who want them, enabling financial planners and advisers to print and study them so they are able to provide sound advice — and be confident most investors will be willing and able to access them.
However, it should require fund companies to print and mail full prospectuses to prospective customers who report they do not have access to computers or are not comfortable downloading and printing documents from the Internet.
The summary prospectuses should clearly inform investors that full prospectuses are available online and by mail.
This announcement of the availability of full prospectuses, together with the SEC’s support, should immunize fund companies, to the greatest extent possible, against lawsuits claiming investors were injured because they relied on the summary prospectuses.
This can be a win-win-win change. It can be a win for investors, saving them time and effort. It can be a win for advisers, for the same reasons. It can be a win for mutual fund companies, saving them money, some of which we hope will be passed on to shareholders in lower costs. And think of all the trees it will save.
