Insights

There is little doubt that despite the importance of reading the terms included in policy documents, very few people actually read them. Reading investment documentation and understanding their potential ramifications has many benefits which may include avoiding extra fees or charges, making sure that the terms suit your needs, dealing with repercussions and market failures, and avoiding complaint redress, amongst others. In fact, it is important to point out  that sending well-written and updated policy documents to investors/members is not only considered to be a fiduciary obligation but is material evidence which can disprove or refute a financial services complaint.

As suggested in the opening statement, people rarely read the documents sent to them. A classic example  would be the terms and conditions attached to a credit card application, or the terms of a mobile phone contract. This is even more so with insurance policies or mutual fund prospectuses. Consumers should be made aware that investment documentation touches every aspect of investing; from the investment pitch, to recording suitability, to noting clients’ instructions in accordance with his/her investment objective to final execution.

Documents are generated to record the purchase or trade, quantity, and execution price. A trail of documentation is also evidence that the investor consented to buy or sell that particular investment as it usually contains a mandate authorising the advisor to conduct transactions with and on behalf of the investor. This note explains why unread or poorly maintained investment documentation leaves room for doubt and a negative effect when volatility in the markets takes place. A proper understanding of investment documentation removes ambiguity and reduces risk between the investor and the advisor and ultimately the custodians of the asset. It also controls the investors emotional response and reactions to market volatility be it positive or negative. It is also important that the language of the documentation provided must not be foreign to the ears of those who are to obey it.

Service providers need to understand that investors are to be treated as consumers so any technical or legalistic language must be properly structured and designed. Fees must be clearly disclosed, and all written information must be well designed to attract rather than repel the reader. Understandably, investment documentation and terms and conditions must include legal provisions as warranted by regulator guidelines and statutory requirements, but it is pertinent that the information presented is clearly conveyed.

This resonates with the fact that it is human nature to react to financial market news, be it positive or negative, and forecast it into the future. This is where the importance of investment guidelines and  documentation come in. These documents are there to be read and properly understood as they take emotional reactions out of the equation and protect both institutional and individual investors from reactionary decisions and foreseeable losses. Crucially, they can also offer continuity, authentication, verification, and clear picture of the client’s journey in the event of a change in advisor or a change in trustee.

It is also pertinent to note that it is the investment documentation which provides evidence of the member’s risk tolerance, the time horizon when the assets will be needed, the income that needs to be generated, the tax situation and the diversified portfolio which meets the members’ investment goals and objectives. It is this same documentation that trustees and advisors have to rely on.

Contract law and the duty to read doctrine creates a conclusive presumption, except as against fraud, that the signee read, understood, and assented to its terms. It is this documentation which becomes pertinent in situations of alleged mis-selling, unsuitability, or inappropriate investment decisions which may be the result of unexpected capital loss.

Consumer protection law responds to the doctrine and duty to read by attempting to induce firms to create a real opportunity for consumers to read. However there still seems to be a contortion of investor obligations, trustee duties and investor/consumer’s conduct even though this is clear from the contractual terms entered into between all parties.

It is now a well-known fact (and a myriad of regulations are in place to ensure that this is not the case) that providing investment advice is not simply a matter of box ticking. An investment advisor owes a fiduciary obligation towards his client to document the philosophy, the plan, the goals, the fees, and the roles of each party to the transaction in a readable manner so as to ensure market efficiency and reduce fairness concerns.

For example, it is important for investors/members to understand the investment structure and that the role of the custodian, advisor and manager are all independent – these lines are often blurred, and many members do not have a clear understanding of exactly how each part is independently involved in each transaction. This is especially the case of trustees, as members are often misguided and expect financial advice from trustees when this is not possible as any form of recommendation to buy or sell would trigger a licence requirement by the local regulator. Reading and understanding the policy documents sent by each entity often clarifies these blurred lines and in case of doubt, the investor would be in a position to question any term a tempo vergine – at the time when the investment is taking place – and not years later when advisors would have changed, brokers moved on and trustees bought out.

The application of the duty to read is especially interesting in the context of financial services as, generally, consumers, investors or the insured agree to the contract because he/she is myopic and thus focuses only on the good consequences of a high return or low introductory fee and fails to appreciate the information given wherein it is stated that return is not always guaranteed and that return is dependent on market movements.

An investor, an insured, a pension scheme member, and any contracting party is bound by the written terms of their contract, whether they actually read them or not. Even though this thought has been a central concern of both courts and contract scholars for decades, in most cases the doctrine of reasonable expectations is applied which means that although consumers typically adhere to and are bound by standardized agreements (without knowing their detail) they are not bound to unknown terms which are beyond the range of reasonable expectation. This is sometimes unsatisfactory as courts find it difficult to decipher what consumers expect in the financial services industry, as opposed to a scenario of consumers as purchasers of goods.

The question whether the consumer plausibly read the investment documentation takes centre stage when courts scrutinise service provider liability. Case law before the Arbiter of Financial Services in Malta has led us to conclude that consumer or investor/consumer inertia is a formidable motivation to keep record of documentation. Advisors and trustees seem to fail to properly appreciate the fact that consumers do not read and question investment documentation provided to him/her. Numerous articles have been written on the importance of understanding terms and conditions relating to a product but it seems that the   same emphasis has not been made with regards to investment documentation. On many occasions, albeit the investor, ex admissis, confesses that the documentation was received, understood, and signed, he/she would be inclined to attribute loss to the investment advisor or the custodian even though the documentation (as would be the terms and conditions) would include details of the investment package and wrapping which the investor (years later) would claim to know nothing of. This, in turn, undermines market efficiency and raises fairness concerns.

However, culpability has been mitigated when it was evident that the investment documentation was understandable to the reader (according to law), was sent in a timely manner (including evidence of a read-receipt email), together with a clear message that the documentation or statement was to be read in consultation with a licensed financial advisor. The wording of policy documents must be scrutinised in such a way as to leave no room for doubt as to the content thereof. The consumer must also be given the opportunity to ask any questions should any terms be unclear.

This, amongst other things, is why it is important to remind the investor to revisit his investment/insurance policy at least once a year. Together with an advisor, the investorcan reassess tolerance to risk and confirm that the investment strategy is appropriate. Consumers ought to understand their obligation to react, question and seek advice, in time, to protect themselves from loss. There is a myriad of laws which apply to ensure that investment documentation is suitable for its purpose and thus it can be regarded as negligent for investors/insured to take such a lackadaisical approach to documentation provided to, and signed by them.