As of May 30, the two-page, double-sided Fund Facts document will have to be delivered to clients before they purchase a mutual fund. The question in many advisors’ minds is likely to be: how is delivery accomplished? And what are the exceptions?
The Fund Facts document has, by regulation, been required to be posted on mutual fund firms’ websites since 2014, with delivery not more than two days following a fund purchase. However, simply pointing out the availability of these documents to clients will not be considered “delivery.” This is so, even though mutual fund sales often take place online or by phone.
Generally, face-to-face meetings with clients will be the simplest way to transfer the document, by handing them a printed version. It should then be a straightforward matter to review the document with them, ensuring that reasonable steps have been taken to facilitate their understanding.
Going through the document together, without actual transfer to the client, however, is not sufficient. The transfer of Fund Facts must be tracked and recorded, so it will be essential to have proof that this has occurred. Keeping detailed notes, made at the time of the delivery, is one way to accomplish this.
Electronic delivery is also permitted, so long as the client has consented. This presents a simplified way of meeting the requirement for proof. If the document is sent by email, there must be a separate link or PDF for each document. Mail and fax are also permitted, again with proof that the transfer has taken place.
The mechanics of delivery and trading are likely to be more difficult where instructions from the client are received by phone. The transaction must wait until the client has received the Fund Facts and had an opportunity to read it, a potentially cumbersome situation if the client is in a hurry to buy. As a result of some of these issues, it may be advisable to send clients the Fund Facts documents before speaking with them, and advise them to spend some time reviewing the contents.
Of course, it’s not possible to guarantee that a client will take time to review and understand the Fund Facts document. Advisors are only under an obligation to ensure that it is delivered and that the client has had sufficient time to review it before proceeding with a fund purchase.
It is possible to proceed without the delivery in certain circumstances, so long as the client has agreed, and importantly, the request to waive the delivery has been initiated by the client, not the advisor. Again, such a waiver must be documented. And by no means should this become a regular practice: regulators want this exception to remain a limited one.
In addition, certain payment arrangements and types of accounts do not require a new Fund Facts each time a transaction takes place. These include pre-authorized investment plans (PACs), in which payment for funds takes place on a regularly scheduled basis. In this case, Fund Facts need only be delivered on the initial purchase and once annually.
Other exceptions generally apply to situations where clients have given discretion to make periodic changes in their investments. Examples include managed accounts, automatic re-balancing programs to preserve asset allocations, dollar-cost averaging programs and managed products programs.
In general, when making decisions about how and when delivery requirements are met, it will be helpful to keep the basic regulatory policies behind Fund Facts in mind: is the client aware of the basic features of the fund, including clarity on costs, risks and the suitability of the fund to the client’s investing profile? Or, in the alternative, has the client granted discretion to the advisor to make investing decisions for them?
It seems likely that the initial rollout of the new rule will lead to some hiccups. As a result, it will be advisable to monitor your own practice closely, correct any deficiencies as soon as possible and ensure similar issues are avoided in the future.
This is the second article in a three-part series on Fund Facts point-of-sale delivery requirements.
Up next: Regulators discuss how risk will be assessed