Plea to management details ways to better treat fund investors

Your funds

Your Money

December 05, 2006|By Charles Jaffe | Charles Jaffe,MarketWatch

Dear fund industry bigwigs:

I know you're busy trying to put a bow on a solid performance year so that you can sell it hard in 2007, but I'd hate for the holidays to pass without sending a reminder that investors expect results. Performance is not a gift, it's a promise you make to customers.

That doesn't mean that you shouldn't be giving patient, long-term customers a little something extra.

With that in mind, here is what I want from the fund industry and its regulators this holiday season, on behalf of fund investors everywhere:

An assessment of how sister funds work together.

Management knows that investors are not well served owning several funds with similar styles and overlapping holdings; they also know which combinations of funds would create a false sense of diversification.

Now all they need to do is issue a warning whenever funds are one-quarter identical.

The end of 12b-1 fees.

The 12b-1 fee is supposedly for sales and marketing costs, but it primarily functions as a trailing commission for the adviser who brokered the initial purchase. It is even applied to some funds that have closed to new investors, so that sales and marketing have stopped. It's the "gift that keeps on taking."

Advisers should get their due, but regulators should stop allowing funds to blur expense numbers. If it's a regular expense paid out for owning the fund, don't let it be separate from the core of the expense ratio.

Regular use of the "profile prospectus."

In the mid-'90s, the industry created the "profile prospectus," a summary that answered 11 critical questions. It covered the fund's objective, what the fund can invest in, who it's right for, costs and fees, past performance, the buying and selling process, and more.

It was an easy-to-read supplement to the full prospectus, so that someone who ignored the heavy paperwork still had solid basic knowledge of the investment.

Mandating a two-page, tear-away summary of these key points -- at the front of the regular prospectus document -- the industry would go a long way to helping shareholders get the basics.

Yours in the spirit of the season,


P.S. Look for your gift next week. Think "lumps of coal."

Charles Jaffe is senior columnist for MarketWatch. His mailing address is: Box 70, Cohasset, MA 02025-0070.

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