PFP Briefs: April 5-18, 2004

PWC URGES TRANSPARENT REPORTING MODEL FOR MUTUAL FUNDS: While improving mutual funds’ disclosure requirements is a crucial step, it isn’t enough — funds must adopt a new reporting model that is more transparent, according to a white paper by PricewaterhouseCoopers’ U.S. investment management industry group.The paper, “Communicating the Value of Your Funds: A New Model for Transparency in Fund Reporting,” concludes that disclosure alone, although critical, isn’t the answer to what investors need — and it doesn’t constitute transparency.

“We do not believe that piecemeal increases in disclosures that separately address individual issues, such as transaction costs and other fees and expenses, are the solution to providing investors with the information they need from those who are managing their money,” said Chip Voneiff, national leader of PwC’s U.S. investment management industry group. “To be transparent, information needs to be timely, relevant and user-friendly. Information becomes relevant when it is provided in the context of how it affects the fund’s total return.”

PwC said that it favored a framework for fund reporting that includes four categories of information: market outlook; value-creating activities; investor protections; and financial results beyond just numbers, such as the components of a fund’s rate of return and the impact of actions on return.

FPA SAYS SEC BREAKPOINT PROPOSAL MAY NOT GO FAR ENOUGH: The Financial Planning Association lent its support to a Securities and Exchange Commission proposal that would require enhanced disclosure regarding mutual fund breakpoint discounts, but said that the plan may not go far enough.“This will assist financial planners and investors in understanding the breakpoint opportunities available to them, and will have an overall beneficial effect on consumer protection,” Neil A. Simon, FPA director of government relations, wrote in an e-mail to SEC secretary Jonathan G. Katz.

In particular, Simon said that the enhanced disclosure requirements would assist FPA members in complying with Rule 704 of the CFP Code of Ethics and Professional Responsibility, which requires CFP practitioners to undertake a “reasonable investigation regarding the financial products recommended to clients,” and would assist planners in evaluating fund options for their clients.

However, Simon said that the additional disclosures “are likely to be only marginally helpful to consumers,” because “anecdotal evidence from financial planners who must carefully evaluate their clients’ financial sophistication during the financial planning process suggests that the vast majority of shareholders fail to read fund prospectuses.” The e-mail continued: “Absent the professional services offered by financial planners and/or refinement of fund prospectuses, adding to an investor’s reading burden may be of little additional value.”

The SEC has proposed adopting a July 2003 recommendation by the Joint NASD/Industry Task Force on Breakpoints that would, among other things, require funds to describe in their prospectuses any arrangements that result in breakpoints in sales loads, including a summary of eligibility requirements.

In addition, the SEC would require funds to describe the methods used to value accounts for purposes of determining whether an investor has met sales load breakpoints. The SEC also proposed requiring funds to state in their prospectuses whether they make information about their sales loads and breakpoints available through their Web sites.

MUTUAL FUND ASSETS HIT RECORD LEVELS: In January, investors added a net $43.8 billion to mutual funds, which helped push total mutual fund assets to a record $7.54 trillion at month-end, the Investment Company Institute said.Bond funds took in a net $496 million in January, according to the ICI, a Washington, D.C.-based trade group for the mutual fund industry. Meanwhile, money market funds reported outflows of $19.8 billion.

The January inflows for stock funds were the third largest on record, surpassed only by the $55.6 billion that the funds gathered in February 2000 and the $44.5 billion in January 2000.

The previous record for total industry assets was $7.47 trillion in August 2000. Asset levels reflect money coming into or out of funds and fluctuations in prices of securities.