Why Haven't Open-end Investment Companies Opened Their Arms to the Profile?

By Dianna Doreen
Writer, mPower

In this article: The battle lines are drawn Choose your research weapon "Plain English" helps investors Disclosure documents weigh in Profile and prospectus are not equally matched

The battle lines are drawn:
Modern investors need succinct fund information

Many an investor has fallen asleep trying to wade through a mutual fund prospectus, that massive, mandatory, tell-all document. So why hasn't its younger, streamlined cousin, the profile, become more popular?

The "profile" was born on June 1, 1998, as an advertising tool, due to the SEC's recognition of the modern investor's need for more information in less time. This latest weapon in the consumer's arsenal of fund research owes it existence in part to an industry overrun with choices.

Until profiles arrived on the scene, the only document a potential investor could refer to for information about a fund was the prospectus. But the sheer number of funds available to consumers has increased, and mutual fund companies tend to list a family of funds all in one prospectus, creating fund prospectuses that can be, at best, intense.

Fund companies can offer hundreds of funds each. Companies that sell mutual funds are called "open-end investment companies" a term that Barron's Dictionary of Finance and Investment Terms, fifth edition, says is derived from the fact that these firms "create… new shares on demand, although an open-end fund may close itself to new investors when management decides that it is too large." The terms "mutual fund" and "open-end investment company" are often used interchangeably.

According to the latest Investment Company Institute (ICI) statistics, the mutual fund industry currently offers 7,808 mutual funds. ICI, a national association of the American investment company industry, also released December 1999 industry figures showing that 73 million shareholders participate in mutual funds.

More funds mean more prospectuses, but many investors still don't bother to read them.

"One survey showed that less than 25% of investors read (the prospectus) at all. This is why the profile is one of the best things the SEC has done for consumers," said Thomas P. Lemke, author of How To Read A Mutual Fund Prospectus.

Lemke said he co-authored the book for his parents, and all investors, because of the difficulty prospectuses present investors, "… especially when there's a whole fund family represented in one prospectus."

Choose your research weapon: the profile, or the new-and-improved prospectus

That's why the SEC created Rule 498, which paved the way for fund companies to provide consumers with "a new approach to fund disclosure … that will offer more choices in the format and amount of information available about fund investments."

In short, the profile.

Rule 498.

This disclosure document is an optional piece of sales literature that only replaces the lengthy prospectus upon an offer of shares to an investor. Once an investor buys shares, the fund company is still required to send its new shareholder the fund prospectus.

Profiles are considered an easier way for investors to shop. Generally one-page summaries, profiles enable investors to read about a fund in minutes. A prospectus, on the other hand, is definitely a rainy-day read, since it is an entire booklet including every fund-specific detail there is, written by a mutual fund's compliance department.

Author's choice How To Read A Mutual Fund Prospectus, by Thomas P. Lemke and Gerald T. Lins, is a step-by-step guide to reading a fund prospectus, and has a top-notch glossary of prospectus lingo.

Handy as the profile is, however, it is important to remember that it is an optional disclosure document. On the same day the profile was born, the SEC also issued an industry-wide order that fund companies revamp their prospectuses to make them more understandable.

"Plain English" catapults investors over prospectus walls

The SEC proposed, on the same day that Rule 498 was proposed, that major changes be made in the prospectus format. These changes included the "Plain English Disclosure," which dictated the Commission's belief that: "A prospectus, as the primary disclosure document contemplated under the federal securities laws, should present clear, concise, and understandable information about an investment in a fund."

Barry Miller, an Associate Director for the SEC's Division of Investment Management in Washington D.C., worked with the industry to create the profile. He was appointed to the group that oversaw the profile's trial phase, during which only a certain number of mutual fund companies were allowed use of the document.

"During the trial phase for the profile, mutual fund companies were also required to revise the prospectus," Miller said in an interview. "Since the profile was approved for use across the industry, we've only seen a trickle of profiles."

Miller said this might be because the prospectus changes were required, and the prospectus remains a required document, while the profile ruling simply offered a sales literature alternative for mutual fund companies.

The disclosure documents weigh in

How do both disclosure documents compare?

Generally, a profile is one page long and details essential fund information including quarterly performance, management's investment strategy, share class and expense information, and the fund's goals. The SEC has set forth this format for profiles:

Standardized Fund Summaries:

9 items of key fund information.

Risk Disclosure:

A risk/return summary, including a fund's investment objectives, strategies, risks, performance and fees.

Graphic Disclosure of Variability of Returns:

A bar chart over a 10-year period that illustrates the variability of the fund's returns, including average annual returns compared with a broad-based securities index.

Other Fund Information:

The fund's investment advisor and portfolio manager, redemption procedures, tax considerations and shareholder services.

The prospectus covers:

Basic fund information

Risk/return summary

Complete financial history of the fund since inception

Investment objectives and policies

Management and operations

Shareholder services and listings of other funds the company offers

The newer, streamlined prospectuses utilize formats that are lighter on the tongue and easier on the eyes, but is important to remember that this piece of sales literature acts as a bible for a fund. Everything about a specific fund is still included in its pages, even though fund companies have revamped prospectus language due to the SEC's "Plain English" ruling. They have also given their prospectus pages a makeover, using more white space and bulleted information.

Reasons they're not equally matched

It would seem that the lithe profile should run circles around the heavy-hitting prospectus. But the lack of profiles in use by the industry would seem to prove otherwise.

Consumers have not demanded them, perhaps because they haven't seen them, or maybe because the revamped prospectus is doing its job, with its additional information and one-stop-shopping in terms of meeting sales literature compliance requirements.

One thing that might make companies shy away from the profile is cost. Prospectuses are still required sales literature, which must be sent to new shareholders even if a profile is used upon an offer to buy shares. Also, the profile's performance is required by the SEC to be updated quarterly, which may be more costly than the prospectuses' semi-annual or annual performance updates.

Some mutual fund companies offer profiles, and others do not. If you own mutual funds, or are thinking of buying some, ask the fund company if it can supply a profile. This may make it a breeze for you to access significant information that can turn your investment decision one way or another, especially if you are trying to choose among a number of funds.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Why Haven't Open-end Investment Companies Opened Their Arms to the Profile?

By Dianna Doreen
Writer, mPower

In this article: The battle lines are drawn Choose your research weapon "Plain English" helps investors Disclosure documents weigh in Profile and prospectus are not equally matched

The battle lines are drawn:
Modern investors need succinct fund information

Many an investor has fallen asleep trying to wade through a mutual fund prospectus, that massive, mandatory, tell-all document. So why hasn't its younger, streamlined cousin, the profile, become more popular?

The "profile" was born on June 1, 1998, as an advertising tool, due to the SEC's recognition of the modern investor's need for more information in less time. This latest weapon in the consumer's arsenal of fund research owes it existence in part to an industry overrun with choices.

Until profiles arrived on the scene, the only document a potential investor could refer to for information about a fund was the prospectus. But the sheer number of funds available to consumers has increased, and mutual fund companies tend to list a family of funds all in one prospectus, creating fund prospectuses that can be, at best, intense.

Fund companies can offer hundreds of funds each. Companies that sell mutual funds are called "open-end investment companies" a term that Barron's Dictionary of Finance and Investment Terms, fifth edition, says is derived from the fact that these firms "create… new shares on demand, although an open-end fund may close itself to new investors when management decides that it is too large." The terms "mutual fund" and "open-end investment company" are often used interchangeably.

According to the latest Investment Company Institute (ICI) statistics, the mutual fund industry currently offers 7,808 mutual funds. ICI, a national association of the American investment company industry, also released December 1999 industry figures showing that 73 million shareholders participate in mutual funds.

More funds mean more prospectuses, but many investors still don't bother to read them.

"One survey showed that less than 25% of investors read (the prospectus) at all. This is why the profile is one of the best things the SEC has done for consumers," said Thomas P. Lemke, author of How To Read A Mutual Fund Prospectus.

Lemke said he co-authored the book for his parents, and all investors, because of the difficulty prospectuses present investors, "… especially when there's a whole fund family represented in one prospectus."

Choose your research weapon: the profile, or the new-and-improved prospectus

That's why the SEC created Rule 498, which paved the way for fund companies to provide consumers with "a new approach to fund disclosure … that will offer more choices in the format and amount of information available about fund investments."

In short, the profile.

Rule 498.

This disclosure document is an optional piece of sales literature that only replaces the lengthy prospectus upon an offer of shares to an investor. Once an investor buys shares, the fund company is still required to send its new shareholder the fund prospectus.

Profiles are considered an easier way for investors to shop. Generally one-page summaries, profiles enable investors to read about a fund in minutes. A prospectus, on the other hand, is definitely a rainy-day read, since it is an entire booklet including every fund-specific detail there is, written by a mutual fund's compliance department.

Author's choice How To Read A Mutual Fund Prospectus, by Thomas P. Lemke and Gerald T. Lins, is a step-by-step guide to reading a fund prospectus, and has a top-notch glossary of prospectus lingo.

Handy as the profile is, however, it is important to remember that it is an optional disclosure document. On the same day the profile was born, the SEC also issued an industry-wide order that fund companies revamp their prospectuses to make them more understandable.

"Plain English" catapults investors over prospectus walls

The SEC proposed, on the same day that Rule 498 was proposed, that major changes be made in the prospectus format. These changes included the "Plain English Disclosure," which dictated the Commission's belief that: "A prospectus, as the primary disclosure document contemplated under the federal securities laws, should present clear, concise, and understandable information about an investment in a fund."

Barry Miller, an Associate Director for the SEC's Division of Investment Management in Washington D.C., worked with the industry to create the profile. He was appointed to the group that oversaw the profile's trial phase, during which only a certain number of mutual fund companies were allowed use of the document.

"During the trial phase for the profile, mutual fund companies were also required to revise the prospectus," Miller said in an interview. "Since the profile was approved for use across the industry, we've only seen a trickle of profiles."

Miller said this might be because the prospectus changes were required, and the prospectus remains a required document, while the profile ruling simply offered a sales literature alternative for mutual fund companies.

The disclosure documents weigh in

How do both disclosure documents compare?

Generally, a profile is one page long and details essential fund information including quarterly performance, management's investment strategy, share class and expense information, and the fund's goals. The SEC has set forth this format for profiles:

Standardized Fund Summaries:

9 items of key fund information.

Risk Disclosure:

A risk/return summary, including a fund's investment objectives, strategies, risks, performance and fees.

Graphic Disclosure of Variability of Returns:

A bar chart over a 10-year period that illustrates the variability of the fund's returns, including average annual returns compared with a broad-based securities index.

Other Fund Information:

The fund's investment advisor and portfolio manager, redemption procedures, tax considerations and shareholder services.

The prospectus covers:

Basic fund information

Risk/return summary

Complete financial history of the fund since inception

Investment objectives and policies

Management and operations

Shareholder services and listings of other funds the company offers

The newer, streamlined prospectuses utilize formats that are lighter on the tongue and easier on the eyes, but is important to remember that this piece of sales literature acts as a bible for a fund. Everything about a specific fund is still included in its pages, even though fund companies have revamped prospectus language due to the SEC's "Plain English" ruling. They have also given their prospectus pages a makeover, using more white space and bulleted information.

Reasons they're not equally matched

It would seem that the lithe profile should run circles around the heavy-hitting prospectus. But the lack of profiles in use by the industry would seem to prove otherwise.

Consumers have not demanded them, perhaps because they haven't seen them, or maybe because the revamped prospectus is doing its job, with its additional information and one-stop-shopping in terms of meeting sales literature compliance requirements.

One thing that might make companies shy away from the profile is cost. Prospectuses are still required sales literature, which must be sent to new shareholders even if a profile is used upon an offer to buy shares. Also, the profile's performance is required by the SEC to be updated quarterly, which may be more costly than the prospectuses' semi-annual or annual performance updates.

Some mutual fund companies offer profiles, and others do not. If you own mutual funds, or are thinking of buying some, ask the fund company if it can supply a profile. This may make it a breeze for you to access significant information that can turn your investment decision one way or another, especially if you are trying to choose among a number of funds.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.