Tags: prospectus | public | vaccinate | insurance

Why You Should Read the Prospectus

By Wednesday, 12 February 2014 07:05 AM Current | Bio | Archive

Ever read a prospectus? Be honest; I won't tell anyone. You're reading this article on a website devoted to financial news. That means you are at least a casual investor.

If you've bought a mutual fund or a stock on its initial public offering, someone gave you a prospectus and told you it contained important information. That was their duty under the law. Having fulfilled it, they were then free to direct your attention elsewhere — and they probably did.

Early in my career, I spent several years selling a complex financial product with a particularly long, imposing prospectus. I would call people by phone to explain what they had just received by mail. Unlike some in our business, my company actually wanted people to make an informed decision.

A very common question was, "How can anyone possibly read and understand this thing? Just tell me what I need to know."

The honest answer: The 200 legalese pages in their hands were ALL important, critical information. It was not our choice to confuse people. State and federal agencies required us to say things that added up to an incomprehensible mess.

The "protect the public" goal is noble, but its application has had the opposite effect. Disclosure documents are so huge and complicated that they hide more information than they reveal. Instead of protecting the public, modern disclosure works against it.

A prospectus or insurance policy is really a kind of legal vaccination for the provider. Here is how it works.

You spend your money, thinking you will receive some kind of benefit. Something unexpected occurs. You call the provider and complain. They tell you, "We're sorry you are upset. We warned you this might happen. Look on page 71 of your policy, footnote 5."

You look, and sure enough, the problematic scenario is right there in black and white. You have a Homer Simpson-like "Doh" moment. You are out of luck.

"But wait," you say. "Representative Bob told me this couldn't happen." Unfortunately, whatever Bob did or didn't say is irrelevant. The company vaccinated itself against him, too.

The legal documents always say something like, "The following 200 pages are all that counts. If Bob tells you something different, it's not our fault that you believed him." It will probably be on the first page in bold print.

So why does the company even employ Bob when, under their own definition, everything he says is insufficient and unreliable? I don't know.

What I do know is that our regulatory structure no longer protects investors from unscrupulous bankers, brokers and insurance companies. It more often protects the industry from the public.

The solution is simple: Don't rely on Friendly Bob or anyone else to protect you from fraud. Read the prospectus. It can — and will — be used against you.

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Ever read a prospectus? Be honest; I won't tell anyone. You're reading this article on a website devoted to financial news. That means you are at least a casual investor.
Wednesday, 12 February 2014 07:05 AM
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