Understanding Shareholders' Use of Information and Advisers (pdf)

THE PRE-PURCHASE PROCESSInformation RequirementsA wealth of information from a variety of sources is availableto consumers considering a mutual fund purchase. Investmentinformation providers include professional financial advisers,newspapers, magazines, investment newsletters, ranking services,and, of course, mutual fund companies. The U.S.Securities and Exchange Commission (SEC) requires mutualfunds to provide certain information to investors before sharesare purchased. 7To determine the information that is important to consumersin fund purchase decisionmaking, respondents wereasked to indicate which of 20 separate pieces of investmentinformation they considered before making their most recentfund purchases. Respondents typically said they reviewed 13of the 20 items of information. The items most frequentlyconsidered by respondents were a fund’s risk level, totalreturn, and the reputation of the fund company offering afund. Roughly nine out of ten respondents cited these items. 8The items of information that the majority of respondents didnot consider before their most recent fund purchase were afund’s portfolio turnover rate, the portfolio manager’s professionalbackground, and the availability of an 800 telephonenumber and 24-hour access.Respondents who had consulted a professional financialadviser and those who had not reviewed a similar amount ofinformation before purchasing their most recent mutualfunds. The median number of items considered by bothgroups was 13. The mix of items reviewed by these two groupswas also not too different, with fund risk and return being thetwo items both groups most frequently considered. Morerespondents who had consulted a professional financialadviser, however, said they considered a fund manager’s tenureand professional background than did respondents who hadnot consulted a professional financial adviser. More respondentswithout a professional financial adviser reviewed fundsales charges, the availability of an 800 telephone number forcustomers, and the availability of 24-hour access (Figure 17).Respondents who effectively leave all fund investmentdecisions to a professional financial adviser reviewed feweritems of information before making their most recent fundpurchase than did shareholders who use advisers but take anactive role in the fund purchase process. For example, themedian number of items considered by respondents whoeffectively delegate all fund purchase decisions to an adviserwas 11, compared with a median of 14 for respondents whoeither tell their advisers what to purchase or work withan adviser to select a fund investment (see Figure 47 inAppendix B).Sources of InformationRespondents typically consulted two information sourcesbefore making their most recent fund purchase. Over 50percent mentioned a professional financial adviser and anarticle from a newspaper, magazine, or investment newsletter.Forty-six percent of respondents indicated using mutual fundprospectuses and annual reports as pre-purchase informationsources. 9 Thirty percent cited friends, family, and businessassociates, and 20 percent pointed to fund company newslet-7Investors purchasing a mutual fund from a sales representative can receive the prospectus, which contains the items that must be communicated to prospectiveshareholders, with the confirmation statement that verifies the purchase of fund shares.8Two other Institute studies—The Profile Prospectus: An Assessment by Mutual Fund Shareholders (1996) and Shareholder Assessment of Risk Disclosure Methods(1996)—asked recent buyers of stock or bond funds to identify the information they reviewed before making their most recent fund purchases. In both of thesestudies, a fund’s risk level, total return, investment goals, types of companies invested in, and annual fees were the five most frequently cited items of information.(Reputation of the fund company was not asked in either study.) However, the proportions citing these items in this report were higher than those citing theseitems in The Profile Prospectus: An Assessment by Mutual Fund Shareholders and Shareholder Assessment of Risk Disclosure Methods. For example, 90 percent of therespondents in this study cited a fund’s level of risk, whereas 68 percent of the respondents in The Profile Prospectus: An Assessment by Mutual Fund Shareholdersand 69 percent of the respondents Shareholder Assessment of Risk Disclosure Methods mentioned this item. The explanation appears to lie in methodological differences.In-person interviews were used to collect the data for The Profile Prospectus: An Assessment by Mutual Fund Shareholders and Shareholder Assessment of RiskDisclosure Methods, whereas the data collected for this survey was gathered through telephone interviews. In the in-person interviews, respondents were presentedwith an exhibit listing a variety of information items and were asked to select those items that they had reviewed. Respondents to the telephone survey, clearly,could not be presented with the list of items. Rather, each item was read to the telephone survey respondents, after which they were asked whether they consideredthat item.9In The Profile Prospectus: An Assessment by Mutual Fund Shareholders, 50 percent of respondents indicated using a mutual fund prospectus as a source of prepurchaseinformation, and 29 percent cited annual reports.20