The mutual fund makeover

Marketplace Staff Jan 5, 2007

KAI RYSSDAL: This is Marketplace Money from American Public Media. I’m Kai Ryssdal.

Truth be told, most of us make and break our New Year’s resolutions in the same week. But here’s hoping the same fate doesn’t befall the Securities and Exchange Commission. Regulators want to make mutual fund information easier for investors to understand and to compare. Duh, right? I mean how many times have you nodded off trying to read a mutual fund prospectus? Maybe it’s the tiny, tiny prints or the page after page of Wall Street speak. Benta Birkeland reports from high country community radio in Colorado that a change is in the works.

BENTA BIRKELAND: One common New Year’s resolution is to get your finances in order. For investors that could mean actually reading the prospectus and quarterly reports they receive instead of tossing them in the trash. Paul Stevens is the president of the Investment Company Institute. That organization represents the mutual fund industry. He says it’s easy to understand why people ditch financial documents.

PAUL STEVENS: There’s always been a concern in our industry that many of these documents that may be received in the mail but are not ever opened, perhaps not read. I’ve concluded that we have a paper driven disclosure system where it’s one size fits none.

Stevens says that’s a problem because about half of the households in the US invest in mutual funds. And those investors should be paying more attention. So the SCC has an answer. It’s in a computer program called extensive business program language or XBRL. The program makes financial data interactive in a standard format. That means investors could click on mutual fund information online and compare it without reading through thick documents. SCC chairman Christopher Cox says it will make it simpler for investors to evaluate how mutual funds perform.

CHRISTOPHER COX: The rapid advances in computing speed that have taken place over the last decade are truly breathtaking, but we haven’t harnessed any of that power in terms of investor disclosure to simplify investor’s lives.

Investors already have choices. They can use mutual fund rating systems, such as MorningStar or Lippert. But Cox says he hopes this new technology would let more companies enter the market. Eventually, he says investors could download a free software program on their computer and comparison shop themselves.

COX: What you and I are interested in as ordinary investors is out after tax, after fee, after inflation return. We’re interested in how much money there’s going to be for the things we’re saving for. For the new house we’re trying to buy, for the kids’ college education, for medical expenses and so until we can convert all of the clutter and information that we’re getting into that kind of usable information we’ll be short of the mark.

Cox says the new system should make it easier to regulate the industry, especially when it comes to mutual fund fees. Those fees drain returns and can be hidden from investors. Jim Angel is a finance professor at Georgetown University’s McDonough School of business.

JIM ANGEL: It’s really a never ending struggle for the SCC to make sure that investors have good information because no matter what kind of rules they come out with, clever people will think of ways to avoid the spirit, if not the letter of the rules.

But Angel says roadblocks are to be expected with any new technology.

ANGEL: So in principle it sounds great, oh we have everything in a nice common format. Well what kind of judgment issues will come up in how you classify one expense versus another.

Two dozen companies are using XBRL technology to report to the SCC as part of a pilot project. Chairman Cox says he doesn’t know how long the pilot project will last but he expects to provide feedback in 2007.

I’m Benta Birkeland for Marketplace Money.

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