If William Lutz had his way, your mutual-fund prospectus would contain the following sentence: “You can lose all your money.”
To Lutz, a Rutgers University professor of English and former editor of the Quarterly Journal of Doublespeak, the phrase above approaches the ideal. Concise, descriptive, it doesn’t mince words — in stark contrast to the obscure wording to which investors have been subjected over the years.
Yes, it’s also painfully blunt, which is why no mutual-fund company has let him put it in any mutual-fund prospectus.
But if Prof. Lutz hasn’t managed to get his “favorite sentence” into any prospectus you’ve read, there are plenty of other things in documents he has written that are nearly as startling for their simplicity and clarity.
Chances are you have never heard of Lutz. Or Nancy Smith or Josiah Fiske. Or, for that matter, a host of other plain-language activists working for government bodies, investment-management companies or consulting firms.
But it’s through their work that what was once indecipherable is becoming readable, and their efforts are coming to a head as the mutual-fund industry faces a Dec. 1 deadline set by the Securities and Exchange Commission for clearer prospectuses for all 8,000 or so mutual funds.
Among their innovations:
– Using personal pronouns such as “you” and “we.” “This is the most important rule, because it assigns responsibility,” Prof. Lutz explains.
– No passive voice, which likewise is imprecise and doesn’t spell out who does what.
– Eliminating redundant information and jargon; they’re confusing.
– Extra white space between paragraphs, and shorter paragraphs, making documents easier to read. And for that matter, organizing text in narrower columns instead of stretching across a page.
Individually, such revisions may sound trivial, but collectively they have the power to change how mutual funds are bought and sold because they so clearly spell out what an investor is buying. Some fund firms may fear such straightforwardness will scare off buyers, but others sense a marketing opportunity. “We think an educated investor is the kind of investor we want,” says Heidi Stam, principal for securities regulation for Vanguard Group, which started its plain-language initiative in 1994.
With the major U.S. stock indexes delivering double-digit returns for the past several years, many investors may not realize they can lose money as well as make it. Under the new guidelines, fund firms must spell out specific risks that a portfolio might face, rather than vaguely discussing investment risk or giving unnecessarily complex descriptions of volatile securities.
Investors will see phrases such as this: “The value of your shares may be worth more or less than the price you paid.” Previously, they would have read this: “The value of an investment in the funds can decrease as well as increase, depending upon a variety of factors which may affect the values and income generated by the funds’ portfolio securities.”
While the SEC deadline has pushed many companies to overhaul their documents, some companies have been working for years to make their material more understandable. Among the first: giant fund firm Fidelity Investments, which brings us to Fiske.
A pony-tailed classical musician based in Boston, he paid his bills by taking on financial writing assignments. In 1991, Fidelity hired him to help solve a problem: Some people who requested its prospectuses, a focus group had revealed, were so confused they simply threw them away. The nine-month assignment involved rewriting the prospectus of Fidelity’s flagship Magellan Fund, and led to rewrites of more Fidelity prospectuses (many of which are currently being rewritten once again to comply with the SEC’s latest mandate).
The project also yielded a new career for Fiske. Indeed, his music now takes a back seat to his thriving Firehouse Communications, a communications/design firm he founded in 1997 with Lynn Riddle, a graphic designer. While he still performs on the French horn, writes music criticism and published a book on music two years ago, most of his time is devoted to financial documents.
Among Fiske’s observations: People decide whether or not to read a given document in just a few seconds. So appearance counts as much or more than simplified language. “Something that looks sophisticated yet approachable will encourage people to look further,” he says.
And a maxim: Organize material logically. “Good language won’t help if readers can’t figure out why a given piece of information is there to begin with,” he says.
For Lutz, chronicling bad writing has been a hobby and interest for years, built on his appreciation for good writing.
About eight years ago he was hired to rewrite a bond-fund prospectus for Dreyfus Corp., now a unit of Mellon Bank Corp. After going through the prospectus carefully, he found 28 sections that made no sense to him. When asked, Lutz recalls, Dreyfus officials weren’t sure what they meant either. Just cut them out, they said.
A Dreyfus spokeswoman couldn’t track down details of that effort, but notes that the firm was “the first” to comply with the SEC’s new-prospectus requirement, filing simplified ones beginning in June 1998.
(Alas for Lutz, the simplified ones that Dreyfus is now using aren’t his handiwork; that project died. Many of the new ones bear the stamp of Fiske.)
In consulting work over the years, Lutz often has been stumped by cumbersome wording and long sentences. How long? Several years ago, while meeting with SEC officials, the group decided it needed examples of how not to write. They didn’t have to look far. There, leafing through prospectuses in the office of Nancy M. Smith, director of the Office of Investor Education and Assistance, Lutz hit paydirt within minutes: a 436-word sentence dealing with a fund’s investment policies.
Smith had become a convert to clearer English while heading New Mexico’s Securities Division and dealing with the fallout from allegedly fraudulent sales of limited partnerships by Prudential Insurance Co. of America. The language in the limited-partnership prospectuses “was legalistic and very hard to understand,” she says. Stumbling over the wording herself, she says, “I couldn’t imagine how an investor I knew, Mrs. Kluver in Tucumcari, New Mexico, could read and understand them.”
In 1994, Smith joined the SEC to create the investor-education program and put a human face on securities regulation.
One of her first steps had been to call Lutz, whom she had met several years earlier, and ask if he had ideas for clearer documents. Indeed he did; he was 110 pages into a book on the subject, he told her.
Too wordy, responded Smith. The resulting “Handbook for Financial Writing,” published by the SEC last year, is 70 pages long, and now serves as a guide for helping companies execute the agency’s instructions.
Already, the fruits of the plain-English movement are increasingly evident.
For example, a Dreyfus prospectus used to say: “The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Securities Transfer Agents Medallion Program (“SAP”) and the Stock Exchanges Medallion Program.”
Now, it says this: “A signature guarantee helps protect against fraud. You can obtain one from most banks or securities dealers, but not from a notary public.”
In Vanguard prospectuses, risk is flagged–literally; every time the prospectus discusses risk, there’s the icon of a flag to focus the reader’s attention. And American Century Investments shrank the prospectus on its international funds to 24 from 36 pages. Industry-wide, most of those several-hundred-word sentences are history.
Now comes the hardest part: Getting investors to read the darn things.
