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Financial Planning > Behavioral Finance

Who Is Served By Disclosure-Gone-Wild?

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By Linda Koco

No matter what the insurance product line, the regulatory and legal system seems to keep close watch on certain disclosure areas–fees, charges and costs; features; and financial relationships.

Other areas of disclosure get attention, too, of course, but those are the big three–the three Fs, if you will–that keep surfacing in headlines, governmental probes and client complaints.

The insurance and financial sector, awash with a myriad of complex and multi-disciplined products, finds it must explain, explain, explain, lest the customer make a wrong buy.

This emphasis on disclosure is going somewhere–i.e., there is more financial disclosure than ever. But it’s not clear that the outcome always achieves the intended result, because much of what is being disclosed in the name of the three Fs is baffling.

When it comes to reviewing insurance and financial documents, I’m a pretty eager reader. I read all the sections, the fine print, the add-ons and the go-withs. It’s interesting. But I have to tell you, a lot of what I’m seeing in these documents today is “more” but not necessarily better.

Disclosure history explains some of it.

As you will recall, various governmental and legal actions over the years have attempted to curtail sales interactions that result in consumer accusations of non-disclosure, too little disclosure or wrong disclosure. The “But you didn’t tell me there was a surrender charge” accusations. The “I was never told how that death benefit (or other feature) works” accusations. The “I didn’t know that he was a stock broker (or insurance agent, etc.)” accusations.

The mindful intent has been to protect consumers, by ensuring they are well and accurately informed.

This is a noble goal, well worth pursuing. The large majority of the insurance and financial sector supports it. They want to keep customers, after all, not lose them. They want customers to buy, not sue. They want customers to understand and like what they bought, not say things about it based on bad information.

So, the industry has responded to the calls for disclosure in many ways. Today’s contracts generally have more definitions. They use simple English. Their literature includes graphics, pictures and stories as well as numbers and legalese. Some include forms for consumers to sign, attesting to their understanding of critical points. Advisors are keeping better records. Online applications have drill-downs that ensure key points get covered before submission.

Still, it’s not a perfect world out there.

First, as always, the bad apples muck things up. So, it is that a sales rep here or a brokerage there gets brought up for violations related to one or more of the Fs. Then, the regulators come out with more statements, profile cases, and admonitions. This spurs new rounds of disclosure overhaul, policy literature and statement re-dos, chart revisions, sales practice restructures, etc. All that patching invites new problems and inconsistencies.

Second, some firms don’t seem to know how their disclosure materials play out to consumers. The material may indeed accurately show the flow of money. However, how the information is positioned on the page, what typeface is used, what words or acronyms are chosen–all this and more can make or break its effectiveness with the client.

Though many firms have made great strides here–they speak plainly and clearly and they organize the data and information into logical, easily identifiable sections–others still wander around the point.

Third, in the effort to do right by all the regulations, rules and “suggestions” concerning disclosure, many entities end up in three nasty entanglements. They are as follows:

==The disclosure sections are too lengthy. Who has time and forbearance enough to read and decipher all of this? (The long problem is especially noticeable in variable contracts, though many firms are working hard to keep it short. Disability insurance contracts set eyeballs rolling, too.)

==The disclosure adds to the complexity of the contract (especially if not well designed). Since many modern contracts are already complex, it can be mind-numbing. How many clients do you know that “get” the disclosure of interest calculations in indexed contracts?

==The disclosure often is needed to clarify various choices in a contract but falls short of crystal-clear status. (This is especially apropos to multi-option policies, build-it-your-way designs and products having a rider group a mile long.)

Disclosure is necessary. It is important. It is worth doing right. But I submit that disclosure-gone-wild is not right, and not effective. Do run it by the legal department. But also run it by the intended audience–the consumer. And then be sure to fix the things the consumers don’t get.

There is more financial disclosure than ever. But it’s not clear that the outcome always achieves the intended result, because much of what is being disclosed in the name of fees, features and financial relationships is baffling.”


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