All these years in the mutual fund business has destroyed the part of my brain that enabled me to speak in precise sentences. Whereas previously I said, “I would like a glass of water,” now I say “I may potentially like a glass of water.” And I use words like “whereas.”
This is because, in the financial services industry, communications to the public are beholden to an elaborate set of rules drafted by government and quasi-government agencies. Their motives are good: to insure that investors are informed of risks before they invest. It’s the implementation that sucks.
For example, in a block of legalese known as the prospectus legend—which is required in the majority of communications— the word “carefully” must be used twice. Adverbs seldom help make a point—and often dilute your message—yet the same adverb is required twice, repetitiously, redundantly. Here is the SEC rule:
Advises an investor to consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing; explains that the prospectus contains this and other information about the investment company; identifies a source from which an investor may obtain a prospectus; and states that the prospectus should be read carefully before investing.
Another example is the summary prospectus, which came out early this year. On the face of it, it’s a great idea: Allow investment companies to provide a four-page summary of the objectives and risks of a mutual fund, rather than burden investors with a lengthy legal document that no one reads.
But again, it’s the implementation that sucks, because the rule also requires that the four-page document link to the long-form prospectus, and specifically to the table of contents in the long-form prospectus. Easily done in HTML, right? But when lawyers think “electronic legal document” they don’t think “website,” they think “PDF.”
Have you ever tried to link one PDF to another? It’s possible, barely. Depending on operating system, browser, and personal settings, sometimes the linked PDF opens in a new window or tab, sometimes it opens invisibly behind the first document, sometimes the pop-up blocker prevents it from opening at all. All of which must be frustrating to the investor who is trying to assess the risks of his or her investment.
Here are some suggestions:
- Mandate that all regulators read and memorize Strunk & White’s The Elements of Style.
- Reduce to its essence the legalese required on communications with the public, similar to the warning on a pack of cigarettes. (OK, maybe the slightly more subtle American style, not the pictures of mouth cancer employed in other countries.)
- Have actual investors participate in extensive user-testing before mandating changes to the way electronic documents are presented.
- Conduct eye-tracking and page-view analysis to see where users ignore or get frustrated by legal disclaimer.
- Partner with asset managers and investors to develop more creative ways to convey risk, e.g., video, quizzes, slideshows, infographics, etc.
All of this would serve the most important constituent—the investor.
This blog post is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Lather. Rinse. Repeat.