Financial services giant Cetera is warning the Securities and Exchange Commission not to allow “the perfect to be the enemy of the good” when it comes to proceeding with the agency’s best interest proposal or its contentious customer relationship summary (Form CRS).
The El Segundo, Calif.-based company, which is the corporate parent of eight broker dealers and registered investment advisors and works with more than 8,000 representatives, said it is important for the SEC to push ahead with the proposals, which are designed to elevate broker regulation and, in the case of Form CRS, provide investors with key information on their broker or advisor, including services, charges and conflicts of interest. The proposals are the subject of much debate and investor testing conducted by the SEC, associations and now Cetera, which show diverse and sometimes opposing results.
Cetera’s own survey of more than 800 investors, conducted earlier in 2018 by Woelfel Research, found that Form CRS was helpful as a starting point of conversation between investors and their financial professional, but needs work. Cetera, however, does not want the regulator to revise the form before finalizing its package of proposals, but rather to do it after the industry and regulators have market experience regarding its efficacy.
“Even if Reg. BI and Form CRS are not perfect, they represent an incremental improvement over the status quo, and can be amended over time,” Mark Quinn, Cetera’s Director of Regulatory Affairs, said in a letter to the SEC. “We therefore suggest that the Commission proceed with the current versions of Form CRS and revisit them after some period of use. Making revisions with the benefit of experience is almost always easier.”
Cetera’s review of Form CRS “found it to be usable useable, understandable, of appropriate length and designed to prompt the reader to ask questions that would fill in gaps in their knowledge and understanding,” Quinn said.
“Given the size of Cetera and the number of customer relationships that we have, we are in a good position to judge what would be meaningful and relevant in the Form CRS, but as we noted above, our opinion is less important than that of consumers. We believe that the results of the Cetera survey clearly establish that Form CRS represents a very good start with respect to a relationship disclosure document. We would caution both the Commission and other commenters not to allow the prefect to be the enemy of the good. With so many diverse opinions, reaching consensus on the Form CRS is not realistic in the short term,” Quinn said. Cetera’s representatives work with more than one million investors he added.
Since Form CRS is a central, perhaps even critical part of the new regime envisioned by Reg. BI, if the summary is not finalized and put into use, implementation of Reg. BI is likely to be delayed. “That is not in anyone’s interest,” Quinn said.
Significant findings of Cetera’s survey include the following:
- Nearly 84 percent of respondents said that they knew more about their financial adviser after reviewing Form CRS than they did before, with only 16% stating they did not know more than they did prior to reading the form;
- Among respondents who have a current or past relationship with a financial adviser, or who plan to consult with one in the future, approximately 90% stated that they knew more about relationships with advisers after reading the Form CRS;
- More than 60 percent of respondents said that Form CRS gave them the information necessary to decide which type of relationship (brokerage or advisory) was right for them.
- 77 percent of respondents who have an existing relationship with an adviser said Form CRS supplied them with the information necessary to allow them to decide which type of relationship was better suited to their circumstances.
A multitude of associations, including the Investment Advisers Association, the CFP Board and AARP, conducted their own tests of the customer summary and found, in contrast, it may actually exacerbate investor confusion. The AARP and CFP Board, which conducted their study jointly, claim that the summary fails to explain to consumers what it means for a broker to operate in their “best interest” because the SEC does not define best interest. As a result, the groups want the SEC to go back to the drawing board on both Reg BI and Form CRS.
“Our testing found that the underlying standard is confusing,” AARP’s Legislative Counsel David Certner told Financial Advisor Magazine.