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WORK & MONEY A BAD CASE OF THE PROSPECTUS RUNS Published December 16, 1996 Other Columns by Ken Kurson Tripod Interview with the author	A Cuban restaurant in SoHo may not be the likeliest setting for a personal finance drama, but one takes sermon opportunities where one finds them. Meeting fellow Tripod columnist Harry Goldstein for the first time, I was on my third beer (never fear -- Randy, our bemused editor, picked up the tab) when the subject of mutual funds arose. Goldstein, it turns out, had recently taken the plunge. After careful perusal of all the right sources, he selected Franklin DynaTech. I raised an eyebrow. I'm on TV every week talking about how overvalued the tech sector is, how most technology companies are trading at or near record-highs, and how their earnings don't justify the gamble starry-eyed market newbies are taking on them. "No, really, it's a good fund," defends the aptly named Harry. "And the best part is that it's geared toward a short-term investor like me." Smelling a rat, I begin to circle, in that smugly superior way only dorky guys who know a little about a little can. "How's that, Harry?" "Well, the load goes down for those who take their money out sooner." I pounce, my sword a simple noun: "Bullshit." "No, really," came the patented Goldstein counterpunch. "I read the prospectus several times and the lady on the phone at Franklin confirmed it." My head reeled. Sweat poured down my back. Everything I know about personal finance was turned topsy-turvy. I grilled him, but he stood firm, insisting that the fees Franklin charged him actually rewarded him for withdrawing from the fund early. "Could it be?" I stammered to myself on the bus home, the diesel fumes mingling with spicy food and cerveza fria to create an even cloudier haze than the one through which I normally see.
A careful first-time investor had been victimized by the disease of prospectus diarrhea.	And suddenly, I realized what had happened. Harry, a careful and painstaking first-time investor, had been victimized by a disease that's ravaging the mutual fund industry: prospectus diarrhea. Mutual fund companies are required by law to send out a document that lists a fund's style, its largest stock holdings, and all its fees. Most important, this document includes the fund's performance history. Sounds great, right? Not so fast. As Eric Tyson put it in "Mutual Funds For Dummies," this document, called a prospectus, is "usually written by very expensive lawyers who wouldn't know a lively and comprehensible sentence if it hit them on the head." Fund companies probably figure that including more information probably serves the dual purpose of reassuring investors that there's a big bureaucracy guarding their money and limiting exposure to lawsuits. The net result is that most investors simply don't read the prospectus. And I'm going to break with sacred personal-finance advice tradition by telling you that not reading a prospectus is no big deal. So long as you do independent research using publications you trust (Morningstar is a dependable place to begin), there's usually no need to read the prospectus. But if you, like Harry, do choose to wade through the fund's minutiae, you should at least be able to count on a clear, intuitive way of comparing one fund to another.
The per-year charges for managing your money are what's most important.	Let's take the subject that so exasperated this pair of Tripodian columnists: fees. In the prospectus for the DynaTech Fund, total fees are listed as $55 for an investment of one year, $76 for 3 years, $98 for 5 years, and $163 for 10 years. Since $76 is clearly more than $55, it's obvious why Harry thought that meant the fees were going up as the fund is held longer. But what he -- and no doubt millions of other investors, didn't understand is that those figures have assumptions built into them. All fund companies build into their fee lists the same assumptions: an initial investment of $1,000 and a 5 percent annual return. That means that, after one year, charges totaling $55 will be assessed on a total return of $1050. That's a net fee of 5.23 percent per year. After three years, a fee of $76 on total assets of $1158 is only 2.19% per year. And after 10 years, the $163 fee on assets that have grown to $1,629 represents a fee of only 1 percent per year. Bottom line: The per-year charges for managing your money are what's important here. The use of the same set of assumptions for all mutual funds is a good thing. It allows apples-to-apples comparisons of funds with different goals sold by different companies. But heaven forbid the prospectuses say in plain English exactly what's going on beneath the sea of numbers that arrive after you call their toll-free numbers. As for Harry, he's doing fine, thank you very much. Ken Kurson, 28, writes the "Advocate" column for Worth magazine and appears weekly on CNNfn. His money zine, "GREEN: PERSONAL FINANCE FOR THE UNASHAMED," is published quarterly and is available for $3 an issue or $10 for a year's subscription. For more information or to subscribe, write GREEN at 245 8th Avenue, Suite 286, New York, NY, 10011. © 1996 Ken Kurson, All Rights Reserved