They are the twin eternal questions of the financial services industry: “When it comes to retail investors, how much information is enough? How much is too much?” International bodies, regulators, consumer advocates, and the industry itself strive continuously to find the right balance.
There are two things we can say for certain: the issue presents a universal challenge; and there will never be a perfect solution. Each investor has a different level of financial literacy, desire for detail, objectives, and tolerance for risk. These factors, among others, mean that disclosure will always be a matter of achieving the optimum result, not perfection.
The Canadian Securities Administrators has taken an important step toward finding the right balance by mandating Fund Facts. Canada joins countries at the forefront of implementing principles for investor point-of-sale disclosure established by the International Organization of Securities Commissions.
Fund Facts was developed in direct response to investors who were tired of trying to make sense of complex documents apparently written more to satisfy legal requirements than to be an accessible guide for investors. The key areas disclosed in Fund Facts are aligned with what investors said they wanted to see. This came through loud and clear in findings from research conducted by regulators and the industry. The result is a product that is light years removed from the dense prose of prospectuses and other mandated disclosure materials that fill blue boxes across the country.
At its heart, Fund Facts codifies what some Canadian investment firms were already providing: a concise, clearly laid-out, plain-language summary of the key facts contained in other prescribed documents, such as the simplified prospectus, management report on fund performance, annual information form and financial statements.
Fund Facts follows the IOSCO principles, while reflecting input from Canadian investors and Canada’s investment funds industry. Because the Fund Facts document is available through many channels, investors have easy access to the information they want about their fund’s investments, performance, risk rating, costs and their rights should they change their mind about owning the fund. They can also easily compare funds in the same category.
The CSA has already indicated that Funds Facts is a living document. The investment funds industry supports this view, believing it is now important to give investors a chance to experience the Fund Facts format and then learn from that experience. As part of its long-term research into investor attitudes, the Investment Funds Institute of Canada will be conducting third-party research into investors’ first year of experience with Fund Facts next summer and encouraging the CSA to undertake similar quantitative research.
One of the aspects of Fund Facts that the CSA has already flagged for review is the section on risk that provides a simplified measure of the volatility risk of a particular fund. Clearly, any summary measure of risk is just that — a summary measure. It cannot be expected to answer all questions about risk. For that, the investor should consult an advisor.
Most Canadians buy their investment funds through an advisor. According to independent investor research, that is the channel through which the majority of investors prefer to receive investment information. Tolerance for risk discussions are part of the dialogue between the investor and the advisor, with Fund Facts risk volatility forming a useful input.
Before Fund Facts, mutual fund investors already had access to more disclosure about funds’ structures and activities than any other retail investment offered in the Canadian market. This material continues to be available through numerous sources, including the System for Electronic Document Analysis and Retrieval, fund company websites and call centres, and investor service providers. Fund Facts is an adjunct to, not a replacement for, these documents. Investors who are comfortable reading through longer documents can still access all of that material. But it is hoped that those who may not have been reading the more complex disclosure documents will welcome the more accessible Fund Facts document.
We believe Fund Facts is an important initiative that gives investors a valuable tool. We believe it will enhance the conversations between investors and their advisors. To those who have been critical of the CSA and Fund Facts since before the project was even out of the gate, we would say, give Fund Facts a chance and then ask investors how they would improve it.
The introduction of Fund Facts for retail mutual funds raises the standard for disclosure for other financial products. We hope regulators will apply the experiences gained from Fund Facts and extend the same concept to financial services products across the Canadian marketplace. IE
Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada.