By July next year it will be easier for investors to compare funds, as all UK authorised UCITS funds must produce a Key Investor Information Document (KIID). This two-page document is intended to provide a consistent comparative tool for investors in the early stages of selecting a fund and must be supplied to an investor before they invest. Any initiative that helps to better inform investors must be a good thing.
The KIID will replace the simplified prospectus as the first port of call for investors selecting funds. It includes fundamental information about the fund in plain, jargon-free language that should be intelligible to the average investor.
Information is divided into five areas: Objectives, Risk profile, Charges, Past Performance, and Practical Information. You can see an example of the document on the IMA’s website.
Starting point
It is important for investors to realise that this is the minimum amount of information required to compare funds and should not be the only information investors rely on when making investment decisions.
Once investors have narrowed down their fund options using KIIDs they may wish to refer to more detailed information, such as the fund prospectus, to ensure they are fully informed about where they are putting their money. KIIDs direct investors to additional information, in the Practical Information section.
The KIID is not a marketing tool as critics have recently speculated. There are very precise requirements around the content and language which can be used in them. They are renewed annually so that the fund performance is accurate and up to date.
However, while past fund performance is of interest, and can give an insight to the kinds of returns the fund provides, it is important investors remember that it is not a reflection of how the fund will perform in the future. Investors need to carefully consider their own risk appetite in line with the fund’s risk profile instead of focusing on what the fund has returned in the past.
Verification by sight
While the concept of the KIID is to be commended it will affect investors wanting to buy funds over the telephone or by post. As with much regulation it might make sense 90% of the time but for the rest.........the issue is the verification that the investor has seen the KIID.
For postal applications an extra step in the process would be needed whereby the KIID was sent to the investor and then verification sought that they had seen it. Similarly, telephone applicants would have to confirm they had actually seen the KIID.
Time of transition
We are now in a transition period for funds to adopt KIIDs and the resulting array of advice documents available to investors currently could be confusing. Until July next year advisers (and investors) will have a number of different documents available which are intended to disclose information about investments. It will be the adviser’s responsibility to identify and present the ones relating to the investments which best suit their clients’ needs.
However, the gradual introduction is giving fund managers adequate time to produce high quality documents and investors time to adjust. Once KIIDs have been introduced across the board we are confident that they will save investors valuable time and effort narrowing down fund options.