Point Of Sale Disclosure For Mutual Funds Miss The Mark

I’ll be blunt – the Point of Sale Disclosure for mutual funds, a 2-page fund facts document which is to be used in place of the long simplified prospectuses at the “point of sale” for mutual funds, is a worthy endeavour but ultimately may prove to be of little or no use. This initiative has been in the works for around 10 years and the sample fund facts provided by the CSA are inadequate. First, an excerpt from the framework document:

“Like the proposed framework, our vision focuses on three key principles:

  1. providing investors with key information about a fund
  2. providing the information in a simple, accessible and comparable format
  3. providing the information before investors make their decision to buy

We want investors to have disclosure that can give them a basic and correct understanding of the potential benefits, risks and costs of investing in a fund and to be able to meaningfully compare one fund with another.”

Providing Investors With Key Information About A Fund

(To see the sample fund facts referenced throughout, make sure to read my previous post which includes some more background and a link to the actual sample fund fact sheets.)

The sample fund facts tell us a bit about the fund, but not enough to make an informed decision. Fund facts have been available from most mutual fund companies in Canada for many, many years. Some versions are even more detailed than the minimum requirements set out by the POS initiative. There are very few advisors who would look up a fund fact sheet *and nothing else* in order to make a recommendation to a client. Most advisors will do quite a bit more research on their own. They may look up the Globefund and Morningstar reports, call up the fund company and book a meeting with a wholesaler, and discuss with their colleagues. A DIY investor who chose to purchase a mutual fund also would not rely solely on a 2-page fund fact sheet. They may also look up the Globefund and Morningstar reports, look for the managers on BNN, etc.

Since an investor using a financial advisor would defer the decision making about which fund to buy to the advisor, what possible function would a 2-page fund fact sheet provide as a POS requirement? It would have to essentially address the risks and information that has a history of “catching people out”. Let me draw an analogy. When you rent a car you sign a bunch of forms but then further initial many more spots on the paperwork to acknowledge certain risks. This is implemented to prevent people from saying “oh I didn’t realize that”. You initial a box to consent to paying twice the going rate for fuel if you bring back the car with less than a full tank. You initial a box to indicate that you’ve been told about the insurance coverage, and you further initial if you want to decline it if your personal coverage covers rental cars, etc. This is exactly what a POS disclosure form is supposed to do. It’s not supposed to tell you how well agency X’s car rental service is compared to everyone else. Ideally, you would’ve figured out which company to give your business to before the “point of sale”.

It is a bit ironic that this document is proposed to be a requirement as a POINT OF SALE disclosure and is intended to address the three key principles listed above. The decision being made is a LONG TERM decision. It reinforces the notion that people do not put enough thought into their financial decisions.

Providing The Information In A Simple, Accessible and Comparable Format

If you ask the average investor (not represented by the readers of this blog, remember) these fund fact sheets are written in a foreign language. If you give these to 10 random people on the street, more than half will have no clue what they are reading in the first place. That notwithstanding, the risk rating is of limited utility as it is subjective, and determined by the fund company. Again, ask someone off the street what a “moderate” risk rating means. The answers will not be the same as what the writers of a fund fact sheet believe.

Providing The Information Before Investors Make Their Decision To Buy

Perhaps this is the fatal principle. This is the job of financial advisors. If they are not doing an adequate job, it has less to do with point of sale disclosures and more to do with the state of financial advice delivery and general financial literacy.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 7 comments
  • Michael James

    Hear, hear! Financial advisors are in a position to help or harm their clients. POS disclosure must focus on the potential conflicts of interest of the advisor, not the funds. The fund information in disclosures may as well be written in a foreign language for most investors.

    • Preet

      Agreed – I’m an advocate of revamping the entry requirements for financial advisors.

  • CanadianInvestor

    Good post. It looks like a form whittled down to nothing, something for the victim, er investor, to take home and put in the recycling basket or in the file with his/her statements, never to see the light of day again.

    • Preet

      Yes, the third party fund facts are more useful. Ironically, this only adds to the cost of running a fund for not much value in return.

  • Naheed Gilani

    Are there any point of sale requirements on unlicensed, advice only/fee based investment consultants?

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