Investor surveys reveal attitudes and behaviours that could make even simplified forms limited in their effectiveness
It’s hard to argue against the importance of making financial disclosures easily understood, particularly for the average investor and especially for senior clients. But acting according to that principle can be challenging, especially when you take human behaviour into account.
That’s something advisors in the U.S. may soon discover for themselves in light of a new rule from the country’s securities regulator.
“A new Securities and Exchange Commission rule requires brokers and financial advisers to describe their services, fees and conflicts of interest in ‘plain English’ and a maximum of four pages,” said Wall Street Journal columnist Jason Zweig.
In a recent piece, he explained that the new disclosure called Form CRS makes financial information simpler, but is still not good enough. “Investors don’t just need to learn what to ask, but why the answers matter,” he said.
The importance of information disclosed, particularly with reference to fees and conflicts, may not be fully appreciated by U.S. investors at the moment. Citing an online survey conducted by the Rand Corporation in preparation for the Form CS regime, it found that investors reading a draft version of the disclosure typically spent 46 seconds reading about fees and costs. They tended to spend even less time — 22 seconds — reading about conflicts of interest.
“Most investors aren’t stupid or irrational,” Zweig stressed. “We are, instead, what I like to call ‘blazy’: busy and lazy.”
It’s not a trivial point. Assailed by a practically unending barrage of information, but confined with a limited amount of time and attention, we as people are not inclined to “think any harder than we have to.” That means investors tend to take shortcuts or just skip doing their homework.
Zweig referred to another survey conducted by the Investment Company Institute in 2018, in which 22% of households that own mutual funds said that fees and expenses are “not very important” or “not at all important.” A separate survey for the SEC asked investors about six common types of fees; for any given type, roughly a quarter couldn’t say whether they paid it or not, and over 20% maintained that they paid no fees at all.
“And because most of us regard ourselves as ethical and competent, we often fail to understand how widespread and harmful advisers’ conflicts of interest can be,” he continued, alluding to a tendency among investors to trust that their advisors will put their clients’ interests above their own. That, coupled with the human tendency to default to truth, leads many to discount the importance of watching out for and understanding potential conflicts.
The antidote, Zweig said, is for disclosures to consider people’s psychology. They should begin by explaining the importance of fees and expenses, particularly as the cost of financial advice and investors represent “the single most controllable factor in how much [their] money can grow over time.”
The significance of conflicting interests should also be stressed early, he added, proposing a disclaimer that emphasizes how advisors may have financial incentives to put their own interests first, and that “[n]o adviser can avoid all conflicts of interest or claim to be conflict-free.”