News Flash: Mutual fund investors don’t read prospectuses!

Bill Sjostrom —  23 May 2006

The Investment Company Institute (ICI), the mutual fund industry trade organization, recently published a survey entitled “Understanding Investor Preferences for Mutual Fund Information.� Click here for the survey and here for an ICI press release with highlights of the survey. Here’s some the findings:

  • Mutual fund investors focus primarily on fees, historical performance, and risk when purchasing funds.
  • Recent fund investors make little use of prospectuses or shareholder reports. Around two-thirds of investors did not consult fund prospectuses or shareholder reports in making their purchase decisions.
  • Few investors reviewed information about a fund’s portfolio manager (25 percent), proxy voting policies (15 percent) or board of directors (15 percent).

These findings are not surprising to me as I would be in the majority on each one.

The survey also includes several findings that go to internet usage by mutual fund investors, mainly, that they have ready access, are comfortable using it, and use it frequently. It’s obvious that these findings are directed at the SEC. The mutual fund industry wants the SEC to adopt the “access equals delivery model� for mutual fund materials. Under the model, a fund can meet delivery requirements by posting materials on the web and notifying investors of their availability instead of mailing hardcopies. The SEC recently adopted the model for prospectus delivery and has proposed a rule applying it to proxy materials. Investment companies, however, are specifically excluded from coverage.

I’m in favor of extending the model to mutual funds. As I’ve said before, hardcopy distribution requirements are simply inefficient and wasteful in the internet age. Further, as the ICI survey points out, few investors even look at mutual fund prospectuses or shareholder reports. Switching to the model will result in cost savings for the funds.  These savings will presumably be passed on to investors, especially given investor focus on fund fees as demonstrated by the survey.