Get breaking news alerts via email

Click here to manage your alerts
Julie Jason: Reasons and methods for reading a prospectus

By Julie Jason

King Features

First Published Aug 15 2014 02:43 pm • Last Updated Aug 15 2014 06:03 pm

Paul knew that he should have read the prospectus for the "risk-free" stock-market investment before he bought it. But the prospect of reading 130 pages of small print stopped him cold. Instead, he threw away the prospectus and relied on his financial adviser to explain the offering to him.

If you are one of the many people who are averse to reading prospectuses, let me explain something: Prospectuses are like kung fu. They teach you self-defense.

Join the Discussion
Post a Comment

Having written prospectuses as a young Wall Street lawyer, I can share a few tricks on how to make it through the legalese.

First, don’t confuse a prospectus with literature. Forget about reading one from start to finish as you would an article or a story. Read it as you would a warning label on a bottle of prescription medicine, remembering that the prospectus is there to protect you. Read it for signs of danger — that is, anything that you can misunderstand to your detriment.

What’s an example? If you are attracted to the product because of guarantees presented to you orally, you’ll want to confirm your understanding with language in the prospectus. You can ask your adviser to point out the relevant language.

Other examples: What about penalties for early withdrawal (contingent deferred sales charges)? Or something that can work to your advantage, such as a waiver of sales commissions for IRA accounts?

Second, remember that commissioned advisers’ job is to sell. Your job is to be a skeptic. Read the prospectus to find reasons you may NOT want to buy the investment. Example: Costs are too high.

Third, scan a few prospectuses. You’ll see that they follow a formula. One section will explain the investment; another will discuss risks; others will set out how to buy, how to sell, charges and fees, taxes and so on. Some products come with prospectuses in multiple parts. Be sure to get them all if you are investing serious money.

Fourth, when in doubt, compare and contrast. For example, if you are presented with a variable annuity with guarantees that are hard to understand without an interpreter, ask a competing salesperson to present you with a product he or she would recommend. Have each person present the pros and cons of each product, but don’t stop there. Compare and contrast each prospectus as well, section by section.

Fifth, don’t buy something before getting answers to the following key questions:

story continues below
story continues below

1. What does the investment promise to deliver?

2. Under what conditions will the promise not be delivered?

3. If there are guarantees, against what, by whom and under what circumstances? Guarantees of any sort need to be studied closely, since they can be misunderstood. Unconditional guarantees don’t exist.

4. What are the risks associated with the investment in normal markets as well as in the worst-case scenario?

5. What is the most you can lose and under what circumstances?

6. How can you get your money back?

7. Are there any penalties?

8. What are the tax consequences?

9. What are the costs of buying the investment, compared with the cost of owning the investment and the cost of your selling the investment?

With the information you find in the prospectus, you can ask more direct questions and ultimately make a more reasoned investment decision.

As a rule, you don’t want to buy something until after you have read about and understood the benefits and the risks of the investment, especially if there is pressure to take advantage of a special feature, such as a bonus that is "only available until 3 p.m. today."

Next Page >

Copyright 2014 The Salt Lake Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Top Reader Comments Read All Comments Post a Comment
Click here to read all comments   Click here to post a comment

About Reader Comments

Reader comments on sltrib.com are the opinions of the writer, not The Salt Lake Tribune. We will delete comments containing obscenities, personal attacks and inappropriate or offensive remarks. Flagrant or repeat violators will be banned. If you see an objectionable comment, please alert us by clicking the arrow on the upper right side of the comment and selecting "Flag comment as inappropriate". If you've recently registered with Disqus or aren't seeing your comments immediately, you may need to verify your email address. To do so, visit disqus.com/account.
See more about comments here.
Staying Connected
Contests and Promotions
  • Search Obituaries
  • Place an Obituary

  • Search Cars
  • Search Homes
  • Search Jobs
  • Search Marketplace
  • Search Legal Notices

  • Other Services
  • Advertise With Us
  • Subscribe to the Newspaper
  • Access your e-Edition
  • Frequently Asked Questions
  • Contact a newsroom staff member
  • Access the Trib Archives
  • Privacy Policy
  • Missing your paper? Need to place your paper on vacation hold? For this and any other subscription related needs, click here or call 801.204.6100.