Research unveiled Wednesday by four advisor and consumer groups found that the SEC’s proposed Regulation Best-Interest disclosures not only confuse investors, but also give them a false sense of confidence that their investment professional will make their money grow.
In an unusual move that resulted from the Securities and Exchange Commission failing to disclose its own testing results, the AARP, the Consumer Federation of America (CFA), the Certified Financial Planner (CFP) Board of Standards and the Financial Planning Coalition spent $45,000 to study investors' reactions to the SEC’s proposed “customer relationship summary” form—the lynchpin of the SEC's proposal that is supposed to help investors understand key differences between broker-dealers and investment advisors.
“We believe the results of this testing clearly indicate the need for the [SEC] to revise and retest the content, language and format of the forms,” AARP Executive Vice President Nancy LeaMond said at the groups’ press conference announcing the results.
CFA Director of Investor Protection Barbara Roper said, “Measured by the standard the commission itself has identified—does the CRS, as currently designed and drafted, reduce investor confusion and enable informed choice—the answer from our testing is clearly no, it does not. The good news here is that the CRS could be fixed, if the SEC has the will to fix it.”
The organizations hired an independent disclosure design experts, the Kleimann Communications Group, to conduct usability testing of the CRS. The tests, using a mockup of the dual registrant summary, consisted of 90-minute, one-on-one interviews with 16 investors in Philadelphia, St. Louis and Calabasas, Calif.
“Few participants could define the term fiduciary standard and few knew what the specific obligation would be,” said Susan Kleinman, CFO of the firm. “Instead they thought best interest meant…increasing their money and meeting their goals.”
These, according to the advisor and consumer groups, were some of the key findings of the study, including the quotes of some of the respondents:
• Investors did not understand legal disclosures: Participants did not understand disclosures regarding the differing legal obligations that apply to brokerage and advisory accounts. Most participants assumed the standards would be the same despite the different language used to describe them.
“They would probably be exactly the same. If it’s an industry standard it would be standard across the board for everybody.” —St. Louis investor.
“If there is indeed a difference in the way the law treats a broker-dealer service versus the way the law views an investment advisor firm, that difference needs to be made clear, if there is, in fact, a difference—which I do not know from these statements.” —Philadelphia investor.
• Investors did not understand the term "fiduciary standard": Most participants had little or no understanding of the term “fiduciary duty.” They were more comfortable with the term “best interests,” although their actual understanding of its meaning was mixed. Only a few recognized it as an obligation to put the customer’s interests first and to develop recommendations that reflect their personal goals and financial situation.
“Well, first of all, I have no idea what their fiduciary standard is.” —St. Louis investor.
“For a regular guy that punches a clock, I don’t see that word (fiduciary) often or anything.” —Philadelphia investor.
• The respondents did not understand critical distinctions between different payment models, fees and associated services: Participants struggled to articulate a clear distinction regarding the nature of services offered as part of brokerage and advisory accounts. The only feature of the accounts that was well understood by nearly all participants was payment per transaction versus a percentage of asset fees. But many could not translate that understanding into a determination of which model was the best match for them.
“They’re both saying the exact same thing. They offer advice on a regular basis, regularly monitor my account, contact by email. They’re both basically doing the same thing.” —Calabasas investor.
• Investors could not figure out which type of fees might cost more: Participants were confused by disclosures regarding fees and costs. Both the content and the terminology in this section left participants confused and overwhelmed. They did not feel that the information provided enabled them to determine which account would cost them more.
“Once you get down to fees and costs, it’s time to stop with big sentences and start showing some figures.” —St. Louis investor.