The Securities and Exchange Commission hoped that a new disclosure document it created would help consumers understand what kind of advisors they are working with—whether it’s a broker, an RIA or a dually registered rep. But then the agency did a survey of would-be customers and found the four-page document left them confused.
The RAND Corporation performed an online survey of 1,800 investors and followed up with qualitative, in-depth interviews administered by independent research firms. The results show that investors want critical information about the fees an investment professional will charge them and the types of conflicts of interests that may be costing them more money. However, they don’t believe they’re getting those specific insights from the SEC’s proposed disclosure form (called “Form CRS,” for “Customer Relationship Summary.”)
Getting this disclosure form right is a critical task for the SEC, which knows how confused investors are. “Based on my discussions with many retail investors over the last several months, it is clear to me that too many retail investors are not aware of the material aspects of their relationships with their investment professionals,” said SEC Chairman Jay Clayton in a statement announcing the results of the survey.
The CRS form is the communication bridge to consumers in the agency’s Regulation Best Interest package, proposed in April and ostensibly designed to protect and enlighten investors by better helping them understand who they’re working with and how much it costs. While investment advisors are fiduciaries, brokers are not, and dually registered or hybrid advisors—who account for some 90 percent of the industry—can turn their fiduciary obligations on and off without notice to the investor, depending on whether they’re offering advice or making a product sale.
The survey findings are troublesome.
“When you dig into the findings of the qualitative interviews, it is clear that investors struggled to understand, and often misunderstood, the information disclosed,” said Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the SEC’s own investor advisory committee.
Many of the respondents didn’t understand what the word “fiduciary” meant and believed the term “best interest” either should give them complete comfort or otherwise it wouldn’t be an accurate description of services, given the industry conflicts.
Said one survey participant: “I just find it hard to believe that if there's conflicting interest, that someone is actually going to act in my best interest and place my interest [above theirs]. … I mean because this is a business.”
Some participants felt that both the “Brokerage Account” and “Advisory Account” columns in the relationship summary were essentially conveying the same message, which means that the important distinctions between the professionals were lost on the reader.
Many investors wanted more specific information about the fees they will pay to an investment professional, something the SEC’s proposal does not require of the industry.