Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements

Abstract:     
Approximately $10 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high-performing funds. The SEC requires these advertisements to contain a disclaimer warning that past returns don’t guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC-mandated disclaimer is completely ineffective. The disclaimer neither reduces investors’ propensity to invest in advertised funds nor diminishes their expectations regarding the funds’ future returns. The experiment also finds, however, that a stronger disclaimer – one that informs investors that high fund returns generally don’t persist – would be much more effective.

Keywords: mutual funds, securities, advertising, warnings, disclaimers, securities regulation

JEL Classification: G23, G28, K22, M37

working papers series