Study Reveals 78% of Investors Never Read Prospectuses
This topic was addressed by Richard Ketchum, Chairman and CEO of the Financial Industry regulatory Authority (FINRA), at the Insured Retirement Institute Government, Legal and Regulatory Conference in Washington, DC, as reported in Financial Planning magazine. The institute conducted a survey of mutual fund and annuity investors revealed what we already knew, that is that investors rarely read the prospectus. The actual numbers were that 78% of investors seldom if ever read prospectuses. Brokerage firms know that investors rarely read the prospectus because it is such a lengthy document, usually between 100 and 300 pages, filled with legalese written by lawyers for lawyers and the Securities and Exchange Commission (SEC). As would be expected, one of the most repeated tactics in arbitration cases is the defense by the brokerage firm saying that “we sent the customer the prospectus” which contained all of the pertinent disclosures of the risks involved with the investment and therefore they cannot come before this arbitration panel and say that they were unaware of the objectives and risks of the investment. Chairman Ketchum addressed this point by saying “we need to get away from account statements that have too much information that causes investors to just ignore them.” This would seemingly also apply to voluminous prospectuses that “contain too much information that causes investors to just ignore them.”
The actual data from the study revealed that 94% of investors would prefer to receive a shorter, printed summary prospectus online or upon request. This is up from 86% in a similar report done a year earlier. It revealed that if the prospectus was shorter and in written in easier to understand language that 59% of investors would be more likely to discuss it with their advisors. Finally, nearly 70% of the insurance executives felt that the ideal length of a variable annuity prospectus should be less than ten pages.