What's good for the fund industry isn't always so good for fund investors. So when the honchos heading fund companies start asking for some...
What’s good for the fund industry isn’t always so good for fund investors.
So when the honchos heading fund companies start asking for some sort of regulatory relief, investors should be asking “What’s in it for me?” If there is nothing in it for you, as a shareholder, the next step would be to put something positive in place.
That’s the situation investors should be watching when it comes to new proposals that could dramatically change the way funds distribute information, and which could also alter the way investments are purchased.
Early last month, the National Association of Securities Dealers suggested that the Securities and Exchange Commission eliminate the responsibility that a fund firm has to mail prospectuses to shareholders, so long as the investors have access to the documents online.
The push follows an SEC proposal that was not directly tied to mutual funds, but which would cut out the paperwork — in favor of the electronic route — for the final prospectus in an initial public offering of stocks and bonds.
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Electronic disclosure is a big deal for the fund industry, but not because management wants you to have easier access to documents.
Instead, this push is all about sales and profit margins.
Fund companies want an electronic-only form of disclosure to meet legal requirements for selling a fund to a new investor. If that happens, a firm would no longer have to send out a prospectus, it could simply respond to your inquiry with an e-mail.
Once you push the button saying you have read the prospectus, you would be able to proceed directly to sending in your money.
Saying that you have read a disclosure to the point where you are ready to make an investment decision is not exactly the same thing as actually reading the documents.
Prospectuses, in general, are not widely read, but at least there is the hope that investors will catch something as they thumb through the booklet and look for application forms.
SEC insiders seem to think that online-only disclosure is not sufficient (firms would still be required to provide paper copies to anyone who does not have Internet access or who opts to continue taking documents by mail).
There is little doubt that a growing number of investors prefer electronic disclosures, where the fund firm sends a notice that links to the relevant paperwork. The Vanguard Group has said that about one-sixth of its customers now take delivery by e-mail.
Behind the scenes, however, fund executives who track this data say that the actual readership of the documents — the people who follow through the links and actually spend time perusing the ownership details — is minuscule.
It’s not like paper prospectuses are hot page-turners that investors can’t put down. Truth be told, the documents are dull and hard to read in all cases. And investors should have the choice of how they want to receive documents, so that they can select the form that works best for their personal habits.
If investment firms are serious about moving to electronic disclosure, they must be pushed into providing superior information, something fast and straightforward that investors might actually read before clicking through.
Without that improvement — plus the pass-through of cost savings — electronic disclosure is a one-sided deal.
Here’s hoping that regulators are smart enough to recognize that.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.