Advisor Today > > August 2001: The Lighter Side of Life

The Lighter Side of Life: Not For the General Public

Disclaimers may be doing more harm than good.

Ron Hauenstein, CLU, ChFC

Have you ever read the fine print in a mutual fund advertisement? I wonder if anyone does, since you need a 20-power magnifying glass and an advanced degree in finance to translate these messages from the printed word to neural synapses that can be stored in the part of the brain labeled "trash."

Popularized by the warnings on packs of cigarettes, disclaimers are credited with a 3,000 percent rise in class-action lawsuits in the last 20 years, according to the highly regarded Center for The Abuse of the American Judicial System (circle 97843 on the Reader Service Card). On the other hand, it is generally agreed that disclaimers also have prevented nearly six billion additional lawsuits by disgruntled investors and insurance consumers who read prospectuses from cover to cover and still managed to lose money last year (had these expenses been deducted, total returns would have been lower).

For example, without disclaimers, we would not know that these ratings reflect the analysts' assessment of each insurance company's financial conditions and its ability to meet its obligations to contract holders as of the date of this brochure. Imagine how refreshing it would be for consumers to have this vital news dished up straight: "We think these guys are pretty sound, but if they go broke, you'll be left holding the bag. Don't say we didn't warn ya."

Without disclaimers, we would not know that coffee freshly dispensed from a pot is hot or that lawnmower blades are dangerous. Fortunately, because of disclaimers, we now know that market volatility can significantly impact short-term performance. Results of an investment made today may differ substantially from the fund's historical performance.

I wonder how many buyers of variable universal life insurance policies know that results shown are based on hypothetical rates of return which are not guaranteed and that actual results may vary. Wouldn't the forests of America be faced with extinction if every prospect for this product knew that this illustration must be preceded or accompanied by a current prospectus and that the illustration is not valid unless all pages are attached?

I wish I could resurrect the common-sense hero Will Rogers and let him write an investment prospectus, assuming the disclosure cops would give him free rein to do so. First, set the tone that when it comes to complicated issues like buying variable investment products, the playing field is level: "Everybody is ignorant. Just on different subjects." I imagine Will would also want to set a moral tone for any investment: "They may call me a rube," he said, "but I'd rather be the man who bought the Brooklyn Bridge than the man who sold it."

Although we aren't allowed to give investment advice, Will boldly told people the secret to getting rich: "Don't gamble. Take all your savings and buy some good stock and hold it till it goes up; then sell it. If it don't go up, don't buy it."

As Marlene Dietrich said: "There is a gigantic difference between earning a great deal of money and being rich. "

Did someone forget to tell our prospects and clients that the quickest way to double your money is to fold it in half and put it back in your pocket?

I'd like to see an investment company experiment with its disclaimers to see if they are being read by promising something like: we will send $50 to the first 100 people who call this number and say they like our ad. In fact, I'll run the risk that my readership is greater than that of any prospectus by making this pledge: Email rhfactor02@yahoo.com with this statement: "Ron, you are no Will Rogers." Include your name and address and I will send $10 to the first three people who reply.

I acknowledge that many people in America who want to get rich don't know a stock from a bond or a money market account from a small-cap growth fund. But do disclosures help protect them? If we tell them that portfolio attributes, share prices, yield and returns will vary and you may have a gain or a loss when you sell shares, do they really understand what they have read? Our clients and prospects want maximum gain and minimum risk, but no matter what we tell them at the opening interview, all they seem to remember is the word "gain." They quickly forget that results of an investment made today may differ substantially from the fund's historical performance.

I wish it mattered that the ads say Member NASD, SIPC. But has any prospect or client ever asked you if your broker-dealer is with the NASD or your product is insured through SIPC? Not me. Our prospects/clients might understand our illustrations better if we could use a large-type, rubber stamp with this message: THESE NUMBERS ARE GUARANTEED TO BE WRONG! That carries a lot more meaning for me than the statement that this illustration is hypothetical and may not be used to project or predict investment results.

And of course we should always, always remember that when the wholesalers drop off those color glossy charts that depict the wonderful performance of their funds in relation to those of their peers that the paperwork is for Registered Representative use only. Not to be reprinted or used with the general public.

Comments on this column may be addressed to Ron at 818 W. Riverside Ave., Suite 500, Spokane, WA 99201, or rhauenstein@ft.newyorklife.com.

Top | Back | E-mail to a Friend | Print

If you are not receiving your magazine or need to change your address,
please contact membersupport@naifa.org.

For comments on articles on this website contact mleyes@naifa.org.