Don't kick the can, Pt. 2: Disclosure trapsArticle added by Steven McCarty on May 3, 2010
Steven McCarty

Steven McCarty

San Diego, CA

Joined: March 22, 2006

What exactly should you disclose? That varies by license type, but generally disclosures fall into four basic areas.

As I mentioned in my previous article, booby traps have been a part of war for centuries. They involve the setting of lures that the enemy hopes will attract their opponent. When the soldier touches the lure, the hidden bomb or other device goes off, killing or maiming the unwary soldier.

I also provided a case in point. In Vietnam, the Vietcong noticed that American soldiers liked to kick empty soda cans lying on the ground. Soon, they began leaving devices in cans so they exploded when kicked. Yet, U.S. soldiers kept kicking cans.

Today's equivalent of kicking the can is agents falling into solicitation, disclosure, suitability or servicing traps. Having already covered solicitation mistakes, let's move on to disclosure.

What exactly should you disclose? That varies by license type, but generally disclosures fall into four basic areas:
  • Information about the product your prospects are considering purchasing, including specific details that define how the product works, its material risks and its future performance.

  • Information about the carrier that will provide the product, including its rating and track record.

  • Information about the application and any underwriting process, especially about the risks of providing false medical information for health, life or disability insurance.

  • Information about the specific product illustration provided in your sales presentation, especially the difference between future values that are projected vs. guaranteed minimums.
A fifth type of disclosure involves information about you and your firm. Depending on your license type, you may be required to provide details on your business background, business processes, fees and conflicts of interest.

For example, according to the North American Securities Administrators Association (NASAA), a registered investment advisor representative, must provide all this information and more in the so-called Part 2 of Form ADV and/or the advisor's brochure. This document should clearly spell out the details of the advisory relationship and other business interests of the advisor.

Disclosing the reasons for purchasing a product and getting a written sign-off on those reasons are other important disclosures. So is documenting instances when a prospect declines to buy a product you're recommending. This type of full disclosure can prevent a lot of grief when your client dies and you begin dealing with beneficiaries. Because beneficiaries often challenge the decisions of their deceased parents, it's best to document those decisions very carefully in writing while the parent is still alive.

There are other disclosure items as well, which are beyond the scope of this article. But here's the bottom line: To avoid booby traps around client disclosures, be generous with information, especially if it deals with product needs, costs or benefits.
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