Full and Fair Disclosure - How to Finally Get It

I recently renewed my membership to the Financial Planning Association (FPA) and received a mailing of the FPA Standard of Care membership is required to use. Principle 4 - Provide full and fair disclosure of material facts. The wording on disclosure struck me as something the consumer rarely gets. Consumers often get full disclosure, yet they rarely get fair disclosure. Here's an example of what I'm talking about.

Full disclosure
Not too long ago, a new client came to me requesting that I review her situation. She had been sold a nearly $200,000 variable annuity within her IRA. So that I could properly review the product, the client provided me all of the materials she was given when she purchased the Met Life/New England Financial variable annuity. It was hundreds of pages of disclosure.

The voluminous amount of disclosure was nearly two inches thick. If what constituted full disclosure could be measured by the page, the argument could be made that this fit the bill. The document itself, however, appeared to have been written by lawyers and actuaries and was mind-numbingly technical.

You may already know the drill on variable annuities. The client thought she bought a product that delivered stock market returns with a guarantee that the value would always stay at the high water mark of the account value in any year.

Fair disclosure
Many would defend this disclosure as being fair since the client signed a document saying she read and understood this product. I don't happen to subscribe to this standard of fairness.

I spoke to FPA President, Marty Kurtz, about this issue. I sent him a picture I snapped of this disclosure, and he agreed that this alone did not represent fair disclosure. Kurtz stated, "To be fair, the consumer must be able to understand what they are buying." I asked how that should be done and Kurtz stated the consumer should be given a one page summary of the most important points in font sizes large enough to be read.

I like this idea and, after reading the disclosure and talking to the agent, I would suggest the following for fair disclosure.

Turn the Page to see "fair disclosure"
What fair disclosure should have been
We are recommending you buy this variable annuity noting:

1. You will be paying an estimated annual fee of 2.97% equating to about $5,940 a year, including sub fund fees and fund trading costs not even in the disclosure documents.
2. You will not be getting any value from tax deferral since this is already in a tax-deferred IRA.
3. This product pays a commission of __% to the agency - New England Financial. Thus, large surrender fees are charged for eight years to allow MetLife to recover those costs by passing them on to you.
4. The feature where the product cannot go down in value is only paid out over 14.2 years with zero interest being paid to you. This is the equivalent of the insurance company paying out 66 cents on the dollar, making the guarantee of only limited value.

While this particular product wasn't sold by a Certified Financial Planner or FPA member, I've seen some CFPs that have used these same tactics and unfair disclosure.

My advice
There is no law or financial planning ethic that requires that consumers be provided the one page fair disclosure Kurtz and I recommend. That doesn't mean you can't ask for such a document. Though in this case, I'm guessing the producer would not have put in writing that the value could not go down because, if he had, the client would then have had some legal recourse.

Before you hand over your nest egg to buy any financial product, demand that one page fair disclosure summary. If the planner refuses to give you that page and says that the stack of documents delivers what you need, you can be pretty sure you are not getting fair disclosure and you don't want to buy what he's selling.

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