Some regulators have come to the conclusion that the average “mom and pop” investor has a difficult time even picking up and perusing – much less understanding - the statutorily required hundred-plus-page prospectuses that mutual funds distribute.
Even the Securities and Exchange Commission (SEC) said in SEC Release No. 33-8861: “Prospectuses are often long… Too frequently, the language of prospectuses is complex and legalistic, and the presentation formats make little use of graphic design techniques that would contribute to readability.”
So guess what happens? Fully two-thirds of investors don’t even BEGIN to read the prospectus before purchasing mutual fund shares (Investment Company Institute, 2006).
With these concerns in mind, the SEC recently proposed and subsequently adopted a new simplified disclosure document. Mutual funds now have the option of sending investors this two to four page document, dubbed the “Summary Prospectus,” instead of the statutory prospectus. The Summary Prospectus contains key information about the mutual fund’s investment objectives, strategies, risks, costs, and performance.
This information can also be found in previously extant fund literature (the statutory prospectus, the Statement of Additional Information (SAI), and the shareholder report).
A study done by professors from Harvard and Yale found that providing the Summary Prospectus does not alter subjects’ investment choices. Dollar-weighted average fees and past returns of mutual fund choices are statistically indistinguishable across the three information conditions. However, the good news for the stockbroker, mutual fund company, or investment advisor is that subjects receiving the Summary Prospectus spent less time on their investment decision.
Thus, the principal welfare gain from the Summary Prospectus comes from allowing investors to spend less time and effort to arrive at the same portfolio decision they would have come to after slogging through (or attempting to slog through) the statutory prospectus. Of course, the shorter Summary Prospectus saves paper, printing, and shipping costs as well…and this helps who?
The mutual fund more so than the client it seems…
