Investor Advocacy Groups Question SEC Customer Relationship Summary Form

Noting that they believe a more viable customer relationship summary (CRS) form can still be developed by the SEC as part of its Regulation Best Interest proposal, a group of retiree and investor advocacy organizations has published a report calling the draft CRS form misleading and unhelpful.

Qualitative user testing shows investors would not significantly benefit from the Securities and Exchange Commission’s (SEC) proposal to require investment advisers and broker/dealers to furnish retail clients with a customer relationship summary (CRS) form; in fact, the forms as mocked up by the SEC may even be actively misleading.

The notion of a “CRS form” was introduced as part of the SEC’s proposed Regulation Best Interest. While still very much preliminary, a mock version of the form has been published by the SEC. This form has now been subjected to rigorous independent usability testing by Kleimann Communications Group on behalf of AARP, Consumer Federation of America (CFA), and the Financial Planning Coalition. In a phrase, the groups say the CRS forms are far too complicated to benefit the average retail investor.

By way of background, the SEC’s Regulation Best Interest proposal requires both advisers (who are fiduciaries and will remain fiduciaries under the current and proposed SEC rules) and broker/dealers (who are not necessarily fiduciaries) to provide all retail investors with a standard disclosure document. The CRS forms are “to be less than four pages in length, highlighting the scope of services offered, legal and regulatory standards that apply, all fees the investor will pay, and disclosing conflicts of interest.”

In addition to AARP and CFA, the groups submitting the research results to the SEC this week include Financial Planning Coalition partners CFP Board, Financial Planning Association (FPA) and National Association of Personal Financial Advisors (NAPFA).

“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 CRS,” the group writes in a letter sent to SEC Chairman Jay Clayton and members.

The group calls on the SEC to commit to undertaking a rigorous process to revise and retest the CRS and to delay final adoption of its “Regulation Best Interest” regulatory package “until it can be certain that the disclosures that form the centerpiece of that regulatory package work as intended to support informed investor decisions.”

As the researchers explain, the CRS form testing consisted of 90 minute, one-on-one interviews with typical investors in three demographically diverse locations. The results of this testing clearly show participants do 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, according to the research.

Equally troubling, the focus group testing shows individuals widely do not understand the term “fiduciary standard” with any degree of specificity. They were a little more comfortable with the term “best interest,” although their actual understanding of its meaning was still mixed. Because of the rampant confusion, the groups suggest mere disclosure is not enough to truly tamp down on conflicts of interest in the adviser and brokerage industries.

“Only a few recognized ‘best interest’ as an obligation to put the customer’s interests first and to develop recommendations that reflect their personal goals and financial situation,” the analysis warns.

According to researchers, based on their faulty understanding of the term “best interest,” some research participants actually viewed the CRS “as portraying brokerage accounts in a more favorable light than advisory accounts.” The report cites one anonymous investor who declares, “If I’m looking at my best interest, brokerage would be better for me.” Another concludes that “the obligation sounds better on the brokerage account, because it sounds like they are working on your best interests and treating you fairly.”

The analysis states in no uncertain terms that individuals do not understand critical distinctions between different payment models, fees and associated services. In fact, according to researchers, the only feature of the accounts that was well understood by nearly all participants was the difference in the method of payment between transaction-based versus asset-based fees. But many could not translate that understanding into a determination of which model was the best match for them.

“Participants were deeply confused by disclosures regarding fees and costs,” the report warns. “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.”

The research concludes that “despite favorable testing conditions that required participants to read the documents more carefully than most would on their own, few participants were able to consistently comprehend the information within a single section of the CRS.” Even fewer were “able to integrate and synthesize the information provided in the document as a whole.”

Important to note, despite these serious shortcomings, the investor advocacy groups write in their letter to the SEC that they “share the conclusion expressed by Kleimann Communications that a usable document that communicates clearly and well with potential investors is a viable outcome.”

“We offer these testing results as a first step of an iterative process designed to arrive at a final disclosure document that truly works to support an informed choice by investors between different types of accounts and different types of service providers,” they suggest.