New Look For Prospectuses

The U.S. mutual fund industry should bypass the “profile” prospectus and instead follow the example set by John Hancock Funds, said Jeff Kelley, a senior editor at the research group Morningstar Inc.

The mutual fund subsidiary of Boston-based John Hancock Mutual Life Insurance Co. is mailing new, simplified prospectuses to prospective investors that cover 28 of the company’s 37 mutual funds.

Hancock’s new prospectuses are “highly readable and comprehensive,” Kelley said. “It’s the model that the rest of the industry should adopt.”

Instead, leading fund companies are touting the idea that the best way to deal with the difficulty of unwieldy prospectuses is to create shorter versions, Kelley said.

As far as John Hancock is concerned, shorter is not necessarily beautiful - but simpler is. The John Hancock prospectuses are detailed, often running to 32 pages, but written in language understandable to an average investor.

At least eight other fund companies have mailed profile prospectuses to thousands of shareholders. These four-page documents are designed to answer in plain English a list of 11 questions about a fund’s goals and objectives, investment strategies, risks, fees, expenses and past performance.

The Investment Company Institute, the industry’s trade group, said two-thirds of 1,000 people it surveyed prefer to receive the profile prospectus alone or with the option to order the traditional prospectus before investing.

The industry has even gone as far as to ask the Securities and Exchange Commission to make rule changes that would allow funds to distribute so-called profile prospectuses as a stand-alone sales document.

Despite the lack of blanket SEC approval, the eight fund companies in the pilot program have gone ahead with their profile prospectuses and are mailing them out accompanied by the full prospectuses. Hancock’s new prospectus received its approval from the SEC and state regulators under existing rules as a stand-alone document. John Hancock has opted for the more detailed simplified version.

The fund industry is taking the wrong tack, Kelley said.

“Hancock’s new effort renders the profile prospectus moot,” he said.