Industry sees flaws with fund fact document

The mutual fund industry hopes to make life easier for investors by introducing a two-page “Fund Fact” document outlining the details of a newly purchased mutual fund. But according to some industry executives, the proposed paper has a number of flaws that need to be addressed.

Carole Dagher, legal counsel for CIBC, thinks the proposed document creates problems for investors who buy funds online or over the phone. As it stands, every investor who purchases a mutual fund product must receive the fund fact document, which outlines things like MER fees, performance history and other useful information. Dagher argues that while it’s not a big deal to give the document to a client during an in-office meeting, getting that sheet to Internet users is easier said than done.

Her main concern is that investors may be forced to halt an Internet or phone transaction mid-purchase because they have to wait until they’ve received the fund fact sheet. This could pose serious problems if an investor needs to make a trade fast. “We think that the interruption of a transaction could be highly problematic in a time of market volatility or in RSP season when investors have to make investment decisions in a relatively short time frame,” she told a large crowd at the IFIC Annual Leadership Conference on Wednesday.

“We did have some pretty quick markets in August,” adds Nick Pallotta, senior manager at TD Asset Management. “The ability to tell a client that they’ll not be able to get out of this position becomes a little hairy for some people.”

For Pallotta, who also spoke at the IFIC conference, interrupting telephone transactions are his main concern. TD has a number of call centres where each representative receives between 50 and 80 transaction-related calls a day. “When dealing over the phone, it becomes difficult to shove a fund fact over the phone line,” he says.

Fax and e-mail could help get the document to the investors, but that won’t solve the problem of trade interruptions. “Does it make sense to stop a transaction and say to a client, ‘I’m sorry I don’t want to, or cannot, transact with you, so I’m going to mail this to you first. Call me back when you receive it’?” he asks.

Dagher thinks that delivery problems could force clients to put their investment dollars into other non–mutual fund products.

Another issue with this point-of-sale document is that not all investors need the simplified sheet. If the paper was mandated today, advisors would have to give the two-pager to all their clients, regardless of their investment experience. But many investors are knowledgeable enough that they don’t need the fund fact document. “Institutional investors have a high level of knowledge, and they probably don’t have a lot of use for a document of this manner,” says Pallotta. “These are sophisticated clients.”

He also sees a problem with investors’ subsequent purchases of the same mutual funds. “One of the questions I have is how will a client benefit from multiple point-of-sale documents that they have already seen?”

He agrees that the document should be handed out at an initial purchase, or when an investor makes a significant change, but “there may not be a lot of value to receiving enormous amounts of paper that they may be transacting on, on a weekly basis.”

Of course, implementing anything new costs money, and Pallotta says introducing a new point-of-sale document would be “onerous” for both manufacturers and dealers. “There will be an increased cost of compliance in order to make sure we adhere to policies, the dealer will have to make sure the fund facts are sent to the client, and manufacturers will want assurances that the dealer has sent it,” he says. “Ultimately, the consumer bears these costs in a monetary and opportunity basis.”

Both Dagher and Pallotta think clients should be able to waive the fund fact form. “The [fact there is] no waiver … is problematic because it assumes that one size fits all, that all investors might want to receive the sheet,” says Dagher. “[For subsequent transactions] the concept of a waiver is one that should be reconsidered given that the original document would already have been delivered to the investor.”

Pallotta has another plan, one he calls the “at or after” approach. He says that if advisors can give a client the POS document, they will, but if they can’t, the client will get the document later. “It’s like we do today — we’d automatically send it to our clients,” he says.

He also would like to leave it up to the clients to decide how they want their fund fact sheet. “Do they want to stop the sale now, or could we ask them if they want it later?” he asks.

It’s still early for the Joint Forum of Financial Market Regulators — the group responsible for creating the document — to address these issues directly, as comments will be accepted until October 15. But it’s already clear that simplifying things can be a complicated process.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(10/04/07)

Bryan Borzykowski