Safe Disclosure: Share Information to Prevent Lawsuits
As we mentioned, in a prior article (Safe Solicitation), 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.
We 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 those cans.
Today’s equivalent of kicking the can? Advisors falling into solicitation, disclosure, suitability, or servicing traps, which increases the odds of getting sued for errors and omissions. Having covered solicitation mistakes last month, 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 carrier ratings 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.
A fifth type of disclosure involves information about you and your firm.
Depending on your business type, you may be required to provide details on your background, business processes, fees, and conflicts of interest. For example, registered investment advisor representatives (IARs) must provide all this information and more in the so-called Part 2 of Form ADV and/or the adviser’s brochure. This document should clearly spell out the details of the advisory relationship and other business interests of the adviser. Disclosure requirements vary by business type and industry, so make sure you know what your regulators expect of you.
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. Both areas are important sources of client disputes. So to avoid legal problems and costly errors-and-omissions claims, always make required disclosures and get the client’s signature.
There are other disclosure items as well, which are beyond the scope of this article. But here’s the deal: To avoid booby traps around client disclosures, don’t “kick the can.” Be generous with information, especially if it deals with product needs, costs, or benefits. It’s much easier to share information now than it is to get sued later. Although your errors-and-omissions insurer will investigate a client’s allegations, settle the matter, and/or defend you in court, who needs the aggravation?