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Effect of Disclaimers in Mutual Fund Advertisements

This research study examines the effectiveness of disclaimers in mutual fund advertisements and their impact on investor expectations and willingness to invest. The study compares a standard disclaimer with a stronger disclaimer and explores the role of disclaimer prominence. The results reveal that disclaimers are generally ineffective, but a stronger disclaimer helps inform investors and reduces expectations for fund performance. Prominence of the disclaimer does not make a significant difference.

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Effect of Disclaimers in Mutual Fund Advertisements

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  1. Effect of Disclaimers in Mutual Fund Advertisements Molly Mercer [Arizona State University] Alan Palmiter [Wake Forest University] Ahmed Taha [Wake Forest University] Work-in-Progress April 16, 2009

  2. Mutual funds(numbers and pictures)

  3. 8700 / 230 $10,000,000,000,00025% Stocks - 39%Bonds - 18%Money mkt - 40%

  4. Performance advertising(and SEC regulation)

  5. Returncalculation

  6. Periodspresented

  7. Disclaimer / warning

  8. Research questions …(1) Does SEC warning work?(2) Does stronger warning work?

  9. SEC-mandated warning Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares.

  10. SEC-mandated warning (greater prominence) Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares.

  11. Stronger warning Do not expect the fund’s quoted past performance to continue in the future. Studies show that mutual funds that have outperformed their peers in the past generally do not outperform them in the future. Past strong performance is often a matter of chance.

  12. Stronger warning (greater prominence) Do not expect the fund’s quoted past performance to continue in the future. Studies show that mutual funds that have outperformed their peers in the past generally do not outperform them in the future. Past strong performance is often a matter of chance.

  13. The experiment …

  14. Independent and dependent variables (and control)

  15. Independent variables • Standard disclaimer • Standard disclaimer (w/ prominent font) • Stronger disclaimer • Stronger disclaimer (w/ prominent font)

  16. Independent variables • Standard disclaimer • Standard disclaimer (w/ prominent font) • Stronger disclaimer • Stronger disclaimer (w/ prominent font) Control • No disclaimer • No performance data

  17. Independent variables • Standard disclaimer • Standard disclaimer (w/ prominent font) • Stronger disclaimer • Stronger disclaimer (w/ prominent font) Control • No disclaimer • No performance data

  18. Dependent Variables Expectations regarding fund Agree with “[fund] will outperform other funds in the future.” What expect the fund’s total return will be in the next 12 months? Willingness to invest in the fund 3. Would you allocate a portion of your retirement plan contribution to the fund? 4. What % of your retirement plan contributions would you be willing to allocate to the fund?

  19. Our (interesting) results …

  20. Fund will outperform in future (1 = Strongly Disagree; 7 = Strongly Agree)

  21. Expected return of fund

  22. Likely to invest in fund (1 = Definitely Wouldn’t; 7 = Definitely Would)

  23. % Allocation to fund

  24. Performance persistence(1 = Strongly Disagree; 7 = Strongly Agree)

  25. Conclusions …

  26. SEC disclaimer ineffective by any measure • Generally same as having no disclaimer • Stronger disclaimer helps inform investors • Blunts notion of performance persistence • Reduces expectations for fund performance • Reduces willingness to invest in fund • Higher prominence probably not effective • No difference whether SEC or strong disclaimer

  27. The end

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