WASHINGTON-Securities and Exchange Commission Chairman Christopher Cox renewed his battle cry in "the war against complexity" and reminded mutual fund executives that the weapon that will help win the war continues to be technology.
"I've been fighting against legalese and gobbledygook for years," Cox told the nearly 1,100 foot soldiers of the mutual fund industry who attended the Investment Company Institute's 49th Annual General Membership Meeting here last Thursday.
"Getting rid of the gobbledygook is no easy task," he said. But the continued struggle for simplicity is a worthy one: "To give each investor enough information to reach a sound decision," Cox said.
The chairman's charge to the industry is to work with regulators to implement technology to deliver accurate, accessible and, most importantly, useful information to the millions of American investors who rely on the $10.7 trillion industry to help finance their retirements, their educations and their futures.
Cox endorsed the concept of briefer, but more useful, prospectuses, and the option of electronic-only delivery. Such allowances would help serve the very people the SEC aims to protect, said Cox, citing figures from the Pew Internet & American Life Project in Washington. That research shows that whether it be a checking account, bill-pay service or investment portfolio, most Americans prefer to use the Internet to manage their financial lives.
And the need for better, clearer, more concise information extends not only to individual funds, but to 401(k) plans overall, he said.
All of these developments hinge on companies incorporating interactive, or "tagged" data into their filings and investor documents. The next step is for companies to develop tools that allow investors quickly and accurately parse the data to compare investments and help decide which of the thousands of choices they are faced with makes the best sense.
"There is no question that interactive data will improve the quality of the information investors receive about their funds," said Cox, whose tenure at the SEC is inextricably bound to the introduction and adoption of eXtensible Business Reporting Language, or XBRL.
He lauded the mutual fund industry as interactive data pioneers, and acknowledged the industry's critical influence. Half of American households invest in the mutual fund market, whether through employer-sponsored retirement savings plans such as 401(k)s or other mechanisms. About 23% of Americans' financial assets were invested in mutual funds in 2006, compared to only 3% in 1980, according to ICI data.
Today, the process of comparing between funds can be arduous, and is error prone, Cox said. He demonstrated the six steps investors would have to take to compare, for example, expenses between funds.
First, investors would have to know what form, the N-1A, they should call up through the SEC's EDGAR site. Then, they would have to scroll through that document to find expenses-in his example, down to the fifth page. Investors would then have to cut and copy those figures into some type of spreadsheet. Then, they would have to calculate the total, and finally check their work.
And that's only the first fund. The process must be repeated for each.
It's time consuming, and not necessarily accurate, he said. The threat of interjecting error lingers at every step. "It's no wonder not too many people try this at home," Cox said.
What investors really need, he said, are tools. He demonstrated an SEC prototype, but noted that the private sector would do well to develop their own.
In his example, funds were organized into drop-down menus. Investors pick the family, then the fund, then the class of shares they are interested in, and add as many as they like with just a few mouse clicks.
Investors then pick what element of the fund is most important to them: expenses, risk/return profile, strategy or objectives. One more mouse click, and a table appears, alongside a bar chart, illustrating the costs and differences between the selected funds.
"The power of this tool is that it draws directly from the source data provided to the SEC," Cox said. In other industries, such as banking, narrowing the room for human error has boosted accuracy. Banks use interactive data to pull together reports to the Federal Reserve and the FDIC. Before interactive data, about 34% of all reports submitted had to be corrected with subsequent filings. Since interactive data, that figure is less than 5%.
And the tool helps investors see the impact on their own investment. In the case of expenses, the pilot tool allows investors to enter the dollar value of their initial investment and expected rate of return. Another mouse click and a chart reflecting the real dollar impact of expenses among different funds popped up.
"This is just a hint of what you'll be able to accomplish, and what we can expect third parties to do," he said.
In a separate address Wednesday, Amvescap President and ICI Chairman Martin L. Flanagan applauded the SEC's efforts to help investors better understand their funds and 401(k) plans, and the call for more concise, and more useful, disclosures.
But Flanagan warned against letting an obsession over expenses lead investors astray.
In 401(k) plans particularly, he noted, sometimes the cheapest investment is the company stock. Enron and WorldCom proved sometimes the best value doesn't come from the investment with the lowest price.
"Too much focus on fees could also drive employers and workers to look only at holding down total investment costs when they should be looking at how to provide investment growth by constructing portfolios with the full range of investment options to help build a retirement nest egg," he said.
And helping Americans make smart decisions will be the ultimate win for investment companies and regulators alike in Cox's "war against complexity."
"Americans are going to be active investors not only through their working years, but long after they expected to be in retirement," Cox said. "As a nation, we've got to get this right."
(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.