There's a lot more to investment risk disclosure than a few perfunctory oral and written statements, says James Resetar, a senior consultant with Ernst & Young's regulatory consulting group.

In the following article, he lays out some important advice to bank brokers.


Don't assume that customers fully understand the risks of mutual fund investment, even if they say they do. Many customers may still be at a loss in their understanding of mutual fund investments, even after the required oral and written disclosures have been made. Customers, after all, may not want to appear unsophisticated or less than knowledgeable when it comes to investments.

This may be particularly true of elderly customers, who may have little or no experience with investments and who are least able to shoulder investment risks.

Repetition of the facts in a clear and simple fashion in such a situation is not wasted dialogue. The provision of the required written disclosures should be part of the larger process of educating the customer and ensuring full understanding of the risks involved. Educate and inform; don't just disclose.

Avoid using investment jargon and acronyms. Growth and income funds, equity income funds, high yield funds, front- and back-end loads, net asset values, 12 b-1 fees, and other investment language may be well beyond the experience of fledgling investors.

Be sure to explain and employ such terminology in ways the customers can understand.

Customers whose most sophisticated "investment" to date has been a certificate of deposit may not have come in contact with most of the terminology, let alone had a chance to understand why a high growth stock fund is inherently more risky than an equity income fund.

Sales presentation should be handled on a case-by-case, customer-by- customer basis. Each customer is unique, with his or her own investment circumstances and investment knowledge. Some customers may not be a good fit with a mutual fund investing.

More time and greater detail may be required for customers with little understanding of mutual funds. You might even have to explain the difference between an equity fund and a bond fund, or bull and bear markets.

Such customers may not understand what a sales load is, let alone whether it's at the front or back end. Paying careful attention to customer's questions is important to such an individual approach since the questions asked will convey the customers' general level of knowledge and investment sophistication and, most importantly, risk tolerance.

Bank sales of mutual funds should never be viewed as a win-lose game.

The customer relationship should be protected and preserved, even if it means no sale.

If a customer concludes after a sales presentation "mutual funds are not for me ... I'll stick with my CD," that's still a win for the bank. From a customer satisfaction perspective, it's far better to lose a sale than have a disenchanted customer return after an investment has soured. Timing may also be an important ingredient. Suggesting that a customer take a few days to think it over may be all that's needed to ensure full understanding.

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