Research finds mutual fund disclosures are overly complicated

view original post

To determine whether complicated writing and complex fee structures in disclosures could be blamed for investors’ poor decision-making, Xie and her co-authors looked at narrative complexity in summary prospectuses and prospectuses for funds. They evaluated prospectuses based on metrics including:

  • the number of distinct funds presented in a single prospectus;
  • the extent to which the details section’s terminology was duplicated in the prospectus summary, adding to the uncertainty;
  • how many words were typically used in a sentence; and
  • The length of the prospectus as a whole and the summary expenditure disclosure.

The number of share classes, charge kinds, and fee tiers for a given fund were used to quantify structural complexity as well.

The results found “strong and positive associations” between fees and narrative and structural complexity. The funds that had more structural complexity (complicated fee structures) and narrative complexity (less readable disclosures) were also the ones that charged higher fees, which may indicate that this complexity was intended to “obfuscate” high costs.

Given the strict regulations governing mutual fund disclosures and the widespread belief that investing in index funds is an inexpensive method to build a varied portfolio, the authors were particularly taken aback by the results.

To help reduce obfuscation, the authors suggested that authorities could simplify language, tighten regulation on fee structures, and increase advisors’ responsibilities when making recommendations across mutual funds from different companies.

Related Posts