In February 2018, MMPI championed a thought leadership piece on the inadequacies of Key Information Documents (KIDs) that regulators insist must be handed to retail investors prior to any investment. Others have taken up the mantle and are now questioning the sanity of the regulations.
MMPI wrote, “The objective is to inform potential retail investors in a short, coherent format (maximum 3 pages) of the important features of the product so that they can readily compare it with KIDs for other products.” We went on to liken the content of the KIDs to the vehicle specifications that appear at the back of glossy brochures for new cars.
This car has a cylinder arrangement of i-line X8; and a rated output of 190/258; and displacement of 2995; the rated torque is 520/3000 compared to 510/3500 in similar models. Admit it! Does any ordinary driver understand any of this gibberish?
So too with Key Information Documents! They make no sense to retail investors and plainly they do not meet their objectives of allowing consumers compare investment products. In a bizarre way MMPI welcomes this because it enhances the face-to-face experience between our professional financial advisers and potential investors. We shudder to think how retail consumers are supposed to become better informed without this face-to-face intervention.
It has been a standard convention in every walk of life that what the future holds cannot be accurately determined by what happened in the past. Sure there are some similarities and happenstance coincidences but the future is an altogether uncertain realm.
It is also a well-worn conception in the investment world that past performance does not provide an accurate picture of future performance because future projections are not guaranteed. It has become such a staple saying that many consumers can now recite it verbatim “Past performance is not a reliable guide to future performance.” Well not according to the regulators who devised the formulaic format for the KID!!
Incredibly, the KID boldly displays a table of future performance scenarios that are directly and incontrovertibly derived from past performances. This defies logic and flies directly in the face of previously imposed regulation. An unsuspecting retail investor could easily be fooled into thinking that the regulatory-inspired KID is displaying realistic and believable future performance forecasts. This is a dangerous development that is wide open to misinterpretation; exploitation and abuse.
KIDs are specifically designed to fit 3 standard pages. In most instances, the typeface is scaled back to accommodate the fit. Faced with such tiny font size, consumers gravitate towards the headings and tables; ignoring the important text and disclaimers. For instance, the risk score of the investment is given in a numerical box that is easily read and evidently understandable. But the most important notice is buried on page 3; “the information contained, herein, does not constitute a recommendation to buy or sell the product and is no substitute for individual consultation with your financial advisor.” MMPI pities those consumers with no financial adviser!