WARNING: THE SURGEON GENERAL HAS DETERMINED THAT CIGARETTE SMOKING IS DANGEROUS TO YOUR HEALTH.
It just didn't make sense to my young mind why the billboard that loomed over the right field wall of the Babe Ruth baseball field in my hometown had that disclaimer on the cigarette advertisement. One day, I asked my dad why anyone would buy cigarettes from a company that put that message on their ads.
“It’s just the government sticking their nose where it don’t belong,” was the reply as he lit another menthol. Not quite sure what that had to do with my question, I just let it go.
The other day, a friend sent me an ad he had seen for an investment. “If your bank is not paying you at least 5% on your CDs…ours is!” The ad went on to detail several features such as “100% secured”, “short durations”, and “NOT risky…”
“What do you think?” he asked.
“I’m not sure, let me do some research,” I replied.
I was skeptical due to the lack of detail in the advertisement but I always try to keep an open mind.
So I started by going to the company’s website to see if I could better understand if this was potentially an appropriate investment for my friend, or even some of my clients.
On their site, I noticed more ambiguous language such as “we are an independent financial services firm” and “specializing in safe money investments”. A few more clicks and I finally found a list of products they sell. Market Linked CD’s were one of their more prominent offerings with this quote at the top of the page, “Enjoy the stock market’s ups with no need to worry about the downs!”
“How can they advertise all of these claims with no disclosures,” I thought back to that sign in right field, “the government MUST be sticking their nose in here somewhere.” I was not going to let it go this time.
So I typed “Market Linked CD” in the search bar and the very first thing that popped up in the results was an article on the FDIC's site titled, Market-Linked CDs: Don't Let the Possibility of Higher Returns Cloud Your View of the Potential Risks. This was helpful.
Then I scrolled down to the next link, which happened to be a sales brochure for these products from one of the largest banks in the country. It was a nice, professional presentation that provided a list of “Characteristics” and “Advantages” on pages 1-2. Then, finally, there were the disclosures on pages 3-4 under the heading of “General Risks and Investment Considerations”. A summary of which I've listed below:
· Performance risk and opportunity costs
· Limited upside
· Liquidity risk
· Market value uncertain
· Costs to investors
· Credit risk
· Insolvency of the Issuer may result in early payment of the Market Linked CDs
· No periodic interest or dividend payments
· Estimated value considerations
· Conflicts of interest
· Call risk
· Effects of trading and other transactions
· Basket risk
· ETF risk
· Index risk
· Commodity risk
· Currency risk
· Tax considerations
Whew! Now that’s a warning label. I ultimately just sent that brochure to my buddy, to which he replied, “Thanks for the info, I knew it was too good to be true.”
That’s not to say that the product is inappropriate in all circumstances, but it certainly isn't the free lunch that the original advertisement implied. In today’s litigious society, disclaimers and warnings are so ubiquitous that they are considered a nuisance by many. Fortunately, in this case, one probably saved my friend some aggravation or maybe even few bucks down the road.
If only my father had heeded warnings as easily.
I miss you, Pop.
In memory of Jeff Gaines Weeks