When the SEC required all firms to provide investors with a relationship summary beginning in June 2020, the expectation was the form would enlighten consumers about costs of services, how services impact the compensation firms pay financial professionals and any conflicts of interest that may arise from compensation practices.
More than a year later, however, most firms are only doing the bare minimum and even skip critical details investors need to make an educated decision about which financial professional to hire, according to “Evaluating Form CRS Relationship Summary,” a new research report from Morningstar that calls on the SEC to use use enforcement to encourage firms to do a better job.
For instance, of the 100 relationship summaries from broker-dealers, RIAs and dual registrants Morningstar reviewed, just 39% provided details or examples about their compensation models or details about rewards programs, bonuses, profit sharing or other compensation programs they offer to encourage marketing.
“Without this information, investors have no way to guess the scale of each type of compensation and assess how large of a conflict it creates,” Lia Mitchell, a senior analyst at Morningstar, said in a blog today.
Understanding how firms pay their financial professionals is critical to evaluating their conflicts of interest, Mitchell added.
The fact that the summary is the lynchpin disclosure of Regulation Best Interest, the retail advice rule the SEC passed in lieu of creating a fiduciary rule for broker-dealers, makes its effectiveness all the more important to empowering investors, Morningstar said.
While firms are required to tell investors if they will pay commission- or asset-based fees, “most leave out any quantification of these fees in the summary. RIAs were the most likely to provide at least an example of the size of the fee a client would pay, with 48% of firms we reviewed including this. Only 28% of broker-dealers and 20% of dual registrants did the same,” Mitchell said.
Even when numbers were included, “the lack of a consistent standard means some firms gave minimums, other maximums, and only a few described how an investor determines where within the range they fall. The variety in specificity gives investors little ability to compare the costs of services offered by different firms,” Mitchell said.
Morningstar found that firms with the most complex compensation arrangements were the least likely to spell out the the conflicts—a finding that flies in the face of the regulation’s genesis, which was to eliminate costly conflicts.
“Many of the firms we examined accomplish only the bare minimum when addressing conflicts of interest, repeating the same standard phrasing: ‘When we provide you with a recommendation, we must make a recommendation that we believe is in your best interest, and we must not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests.’” Mitchell said.