The Effects of Summary Information on Consumer Perceptions of Mutual Fund Characteristics

Choosing how to best invest for retirement is one of the most important decisions a consumer can make. Unfortunately, this can be an especially challenging task given the current financial information disclosure environment. The objective of this research was to explore whether a modified method of supplemental information disclosure impacts investors' fund evaluations and investment intentions. Results indicate that while investors continue to place too much emphasis on prior performance, the provision of supplemental information, particularly in a graphical format, interacts with performance and investment knowledge to influence perceptions and evaluations of mutual funds. ********** Making wise financial investments is one of the most important and challenging decisions faced by consumers. One way to maintain and build wealth is to purchase shares in one or more of the thousands of available mutual funds. Millions of individuals count on these funds to provide them with a comfortable retirement income (Investment Company Institute 2005). This issue becomes increasingly important with the push by both government and industry to privatize individual retirement accounts. Corporations are shifting the pension burden from a defined pension benefit program to 401(k) programs managed primarily by employees. The 401 (k) plans offered by employers are now the primary form of retirement savings for over forty-two million Americans with nearly two trillion dollars in assets (Lauricella 2004). Proponents of privatization argue that individuals should, from a normative perspective, have the fight to manage their own money. Proponents also argue that individuals could realize greater returns by investing a portion of their Social Security savings into the stock market. For example, a Bush administration proposal would allow individuals to choose from a range of investment options once their Social Security account reached a specified minimum amount. Opponents of privatization argue that novice investors unfamiliar with risk and diversification leave themselves vulnerable to fluctuations within the market. These fluctuations, critics argue, could result in a substantial decline in retirement earnings of those individuals who need the money the most. Employers are increasingly concerned with the difficulty of getting employees familiar with the basics of 401(k) plans. Education has become more difficult with the number of investment options increasing for eligible employees of many company retirement plans. Data support this conclusion. To illustrate, for the ten years ended in 2002, the median return on company-managed investment accounts averaged 6.81% versus 6.35% for employee-managed investment accounts. This difference could result in a difference of $88,000 over a thirty-year period for a $100,000 investment (Lauricella 2004). Innovations in financial services and information technology, as well as increased financial disclosure requirements mandated by regulators, have created a choice environment replete with information. However, navigating through the plethora of information is not an easy task. Investors face mutual fund prospectuses crammed with data regarding a fund's return performance, management expenses, loads, and marketing fees, as well as details of the portfolio's holdings. Given the sheer quantity of available information to investors and the thousands of funds from which to choose, picking the fund that most appropriately matches his/her personal risk-return trade-off is a challenging task even for the savviest of investors. The provision of information in a choice situation typically can provide important consumer benefits such as improved decision making, enhanced product quality, and lower prices (Mazis et al. 1981). However, in order for that information to have a positive impact on the consumer decision-making process, it must be easily accessible and presented in a clear and understandable format. …