For mutual fund investors, the appropriate reaction to President Obama's plan to overhaul the financial system can be summed up in three words: Thanks for nothing.
Love them or hate them, the mutual fund is the investment of the average American, now held by nearly half of American households and almost 100 million individuals. They are the way that middle-class Americans plan for their financial future.
But funds are not the focus of the administration's proposals, not even close.
There is some good news in that, because the whole idea is to upgrade market oversight and regulation wherever the worst problems keep cropping up. That has not been in mutual funds, but instead has come up in many areas as the nation's financial system has evolved from being based on banking - and the safety and security of deposits - to centering on the market, with much heavier reliance on products created by Wall Street's purported "wizards."
The administration's plan has five key components, and only one seems even remotely likely to directly affect fund investors.
The first step is to bring more financial firms - particularly those that create derivative securities and the alike - under regulation, so that their activities can be monitored. Next, the government plans to reduce incentives for ultrarisky investments, which officials say they believe is almost everything that led to the financial crisis. The third prong of the plan involves closing gaps in the regulatory web; this is where the biggest controversies will arise, as everyone fights for turf or argues that their favored investment (particularly hedge funds) does not need to be saddled with additional oversight. The fourth key consideration will be developing tools and weapons that the government can use to stop problem issues from going viral.
The fifth step in the process is to create a Consumer Financial Protection Agency to safeguard the public from "unfair, deceptive, and abusive practices." Chances are the initial focus of any such agency will be looking at mortgage and housing fraud, plus credit card lending, but it may someday extend into the fund world to cover investors who feel cheated or wronged.
The shame of funds' being a nonentity in the overhaul of the financial system is that there are plenty of things officials could do to improve the functionality of funds, to make them more useful and effective for the average investor. A summary prospectus has been approved and is a good start, but politicians could go further and take the following simple changes to make investing in funds easier for average investors:
Require clear definitions of mutual fund share classes. "No-load funds" carry no sales charges - though they can carry a small sales-and-marketing fee that goes to a financial adviser or the fund firm - but distinctions get goofy once sales charges come into play. Typically, Class A shares involve upfront loads - paid all at once - while B shares carry a back-end load, and C shares have no sales charge but carry higher expenses that are used to compensate the broker or adviser who sells the shares.
That said, there are no hard-and-fast rules for what each share class means, and plenty of fund companies have just created their own classes and structures as needed, so that investors hold M or R or T shares with no real idea of how they work.
Eliminate confusing fund names. At a hearing in Washington last week about "target-date funds," the big concern seemed to be confusion. Some investors think the fund is saving for your "target date," the time when you retire. Most funds are actually structured to glide from your target date through the rest of your life.
Regulators long ago required managers to keep the bulk of their money in the asset class and style for which a fund is named (and managers who want to go anywhere can use words that do not describe any style). But new funds are given marketing names, which is why a "target 2010 fund" designed to help investors outlive their money is not called what it really is, a "mortality 2050 fund."
Quote expenses first in out-the-door dollars. Owning a fund should not be a haggle. You invest and the manager gets paid a slice of what you put in. While savvy investors may want a breakdown to know where the money goes, average folks just want to know what's going out; funds should be required to say how much an investor pays to get this investment vehicle out the door and into their driveway. They should know that an investment of $1,000 will pay the manager, say, $12.50 per year in charges.
Increasing confidence in the financial system is a big job; taking the confusion out of some mutual fund basics would be an easy step that the government would be wise to take.