TRUE or FALSE? Your Stock Broker Was “PALTERING”
Broker-customer disputes are often resolved on issues revolving around different perceptions of truth and falsity.  At the end of the arbitration the decision may boil down to one question:  Is your stock broker/investment adviser a liar or a truth-teller?  You may think this a simple question, but it is not.  In the world of broker-dealers there is a gray area, an area where lies are supplanted by euphemism.  Lying is referred to as “fudging, twisting, shading, bending, stretching, slanting, exaggerating, distorting, whitewashing…selective reporting.”  Schauer, Frederick and Zeckhauser, Richard, Faculty Research Working Papers Series: Paltering, John F. Kennedy School of Government – Harvard University (Feb. 2007).

The newest term floating about is “paltering.”  Paltering is “[t]he deliberate attempt to create a misimpression in someone by means other than by uttering a literal falsehood.” Shauer & Zeckhauser at p.9.  Dr. Bennett Blum, an expert in this area says: “Paltering is a form of manipulation that frequently occurs in cases of elder financial exploitation and undue influence…”. 

Dr. Bloom applies the CAIN analysis to deceptive statements.  CAIN stands for Context, Act, INtention.  Whether a deceptive statement is a lie, a palter, a mistake or simply an act of etiquette depends upon context, action, and intention.  By using this analysis you can differentiate between a lie and a palter:

Lying occurs when truthfulness is expected, but the person in question presents factually incorrect information with the intent to deceive.

Paltering also involves an intent to deceive where there is an expectation of truthfulness, but the palterer provides partially truthful information — leaving out relevant details or context (i.e., innuendo, or “lying by omission”) — or does not correct the misunderstandings or misinterpretations of the person being deceived.

PALTERING:  “The deliberate attempt to create a misimpression in someone by means other than by uttering a literal falsehood.

The paltering concept goes hand in hand with the broker’s duty of disclosure.  The stock broker/investment advisor who palters is attempting to bypass his or her duty to fully disclose all relevant information pertaining to the investment.

PALTERING AND VARIABLE ANNUITIES

Paltering is frequently seen in the variable annuities context.  Here is an example:

A financial advisor recommends that an elderly woman purchase a variable annuity.  He tells her that variable annuities provide the benefit of tax deferral (investment earnings that accumulate in an annuity are not taxed until withdrawn).  The advisor has not said anything that is false.  He simply has not engaged in full disclosure.  Specifically, the advisor failed to disclose that the deferred tax benefit is almost always offset by (1) higher fees and surrender charges and (2) higher tax rates.

Higher Fees and Surrender Charges Offset Deferred Tax Benefit

The added expenses associated with the variable annuity  cannot be justified unless the annuity is held for an extended period of time.  In other words, an investor must hold on to a variable annuity for a long period of time–sometimes decades–before the tax benefits will outweigh the exorbitant fees.  It follows that variable annuities should not be sold to individuals who are retired, close to retirement or have short term investment objectives.

Higher Tax Rate Offsets Deferred Tax Benefit

Moreover, the advisor emphasized the potential for tax-deferred growth, but did not adequately disclose that a variable annuity will convert capital gains into ordinary income.  (Earnings in a variable annuity are taxed at ordinary income levels.  By contrast, capital gains are taxed at a rate lower than ordinary income.  If placed in a variable annuity the lower tax rate is lost).  The investor will usually have to hold on to the annuity for several years before reaching the break-even point when the benefit of tax-deferral catches up with the detriment of converting capital gain into ordinary income.

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