Mutual Funds for the Utterly Confused: Investor’s Bill of Rights
Claus Silfverberg, Managing Director, World Federation of Investors Corporations that outlined suggested rights that investors should possess. Steve believes in investors and the contribution they make towards economic growth.
This is a take on those rights designed with mutual fund investors in mind.
1. Mutual Funds will be transparent. Many investments, stocks and other securities are the sum of underlying investments. We know this is true in mutual funds. But how much do we know about what is in those holdings? Before we buy, we can often get a list of the top ten holdings, some information about the risk involved (basically a projection into the future based on the results of the past - a very poor method of prediction), and what the fund is attempting to do.
Mutual funds have balked at the idea of transparency suggesting that to unveil their holdings would reveal their style. Baloney. If you are successful, then you should open source your methodology and see if others can imitate what you have done. This is a way to prove principles and projections and this will make your fund a star among stars or, if you are off-base, and many of these funds are, you will be exposed for what you are.
Transparency is not the same as football coach stealing plays or a baseball player relaying signs to the dugout. Transparency does more than level the playing field, it elevates those who play better.
2. Regulation is not only necessary, it needs to be enforceable. Self enforcement is not the key to making the markets better. Mutual funds are front-loaded with numerous investor protections. IT is the sticks that make up the lion’s share of their investments that need additional accountability. These rules would make speculators more obvious, hedge fund activity more clear and the ability to determine risk somewhat easier.
(I use the word risk with some trepidation. It is not a clearly defined concept other than knowing that some is needed to achieve growth and that there are only a handful of people that know how to manipulate it to be profitable and more importantly, remain profitable.)
3. Retirement Plans should be free of outsized risks (a determination that is easy to amake in the wake of what is happening) and in order to do this, offerings inside of a defined contribution plans should force the fiduciary to guarantee a bottom. Many of these plans would do well to set up sell triggers for their participants who, in spite of themselves, do not bring enough know-how to the process. We know quite a bit about investors, how they think and more importantly, how they react. This knowledge is generally ignored by fiduciaries even as they claim to want to educate investors.
Steve has suggested something different writing: “Dr. [Teresa] Ghilarducci, professor of economic policy analysis at the New School for Social Research, drew the most attention and criticism. She proposed that the government eliminate tax breaks for 401(k) and similar retirement accounts, such as IRAs, and confiscate workers’ retirement plan accounts and convert them to universal Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration.”
Could the solution simply be to switch all pre-existing accounts to pensions?
