`Profile prospectus' idea a victim of apathy

Your Funds

Dollars & Sense

July 21, 2002|By CHARLES JAFFE

FIVE YEARS AGO, the Securities and Exchange Commission and the mutual fund industry worked together to revolutionize the prospectus.

The results were not only promising, they also were approved for distribution to investors.

But once that approval was given, virtually everyone simply gave up on the project.

It's a story that highlights an age-old problem in the industry, namely how fund companies balance what is good for their bottom line with what is good for investors.

The "profile prospectus" was designed to be a Cliff Notes version of the sleep-inducing formal contract between fund and investor. It was an 11-question quick-hit explanation of a fund's most basic-but-vital information that was supposed to come attached to a traditional prospectus.

It wasn't perfect, but it was better than nothing. And since studies show that less than one in four investors relies on the traditional prospectus when making purchase decisions, nothing really is the appropriate comparative standard.

Yet that might be precisely why the fund industry backed away from the concept, because from a legal standpoint it might be better off with an investor who reads nothing rather than one who reads a short sales document like the profile prospectus.

Of the eight major fund families that worked to develop the profile, most never put it into widespread use or they gave it up shortly after they started. Few others ever even tried it.

Some firms folded the profile's format and features into their ordinary prospectus, trying to make the drawn-out document better without short-changing the customer of information.

"You hear that the reason the profile is not being used has to do with the lawyers wanting to protect the fund companies," says Arthur Levitt, who as SEC chairman pushed hard for more simple documents like the profile. "That's a cop-out, because the profile was a useful document. ... The industry wanted something different, settled for the profile and then decided not to do anything with it."

What the fund industry really wanted in 1997 was "off-the-page sales," or the ability to sell funds direct from advertising pages. An investor now has to order or download a prospectus before following through with an investment. The SEC and a variety of industry watchdogs were opposed to direct selling, so the profile became a compromise position.

The profile's answers to 11 essential questions told investors everything from the fund's investment objective and the assets it invests in, to its risk/reward potential, expenses and fees, performance, management and who the fund would be appropriate for.

In theory, this miniprospectus could have been attached to an ad, allowing for a form of off-the-page sales.

But that never materialized, and neither did regular use of the profile.

Instead of considering the profile an extra tool for investors, fund companies considered it an extra cost. The common thinking was that the short-form prospectus wouldn't work until it could replace the regular document, something fund company lawyers and the SEC were unlikely to allow.

There also was concern for investors getting short-changed on information.

"The profile doesn't provide everything the investor should have, but makes them think they have seen enough," says Brian Mattes of the Vanguard Group. "It's more important that funds make their regular prospectus better, so that it's not the old gray mare it used to be."

Instead of using a profile prospectus, most fund companies print regular update sheets on their funds, data pages covering everything from performance to fees to strategy, often including a bit of manager commentary.

But these pages aren't sales documents, meaning that a consumer still must see a full prospectus before investing. The other key difference is that update pages often exclude key data that the profile required, such as performance compared with a relative index and the effect of fees over time.

Sales documents, therefore, represent fund companies' efforts to put their best foot forward, while standing legally on the fact that it's not their fault if an investor can't find warts that are visible -- but overlooked -- in the full prospectus.

The moral of this story: Read the full prospectus, plus any sales documents or updates you get, and call the fund for explanations of what you don't understand.

Your call will take the place of the profile prospectus, the basic document that was supposed to instruct you about a fund. Make your fund company educate you about its products, rather than baffle you with them.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston. 02107-2378.

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