The SEC released Wednesday the results of its investor testing of the Customer Relationship Summary that’s part of its proposed Regulation Best Interest. And the test shows a number of communication failures with investors.

The Form CRS is meant to make it clear to investors whether they are dealing with an investment advisor or a broker-dealer. It requires an explanation of the principal types of services offered; the legal standards of conduct that apply to the investment advisor or the broker-dealer (whichever relationship applies); the fees a client might pay; and certain conflicts of interest that may exist.

“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,” SEC chairman Jay Clayton says in a statement.

Clayton says the SEC staff is “carefully reviewing” the 122-page investor testing report and other information related to the proposed Form CRS.

The investor testing report had been much-awaited by investor advocates, who repeatedly expressed concerns the SEC didn’t seem inclined to release the results.

The SEC’s Office of the Investor Advocate hired RAND Corporation to perform the investor testing of the proposed Form CRS.

RAND’s investor testing consisted of a nationwide online survey of more than 1,800 individuals and “qualitative in-depth interviews” conducted in Denver and Pittsburgh via independent market research firms.

Barbara Roper, Pueblo, Colo.-based director of investor protection at the Consumer Federation of America, says “it is a very positive step’ that the SEC conducted this investor testing for the Form CRS because it’s “central” to the proposed Regulation Best Interest package.

She says there are many useful insights in the report to guide the SEC to improve the Form CRS – if the regulator actually wants to improve the form.

“We think the best way to [improve the form] is to work with disclosure design experts to revise and retest the content, language, presentation and formatting of the disclosures to ensure that they fulfill their intended function of dispelling investor confusion,” she says.

Like an earlier study undertaken by the AARP (formerly the American Association of Retired Persons), CFA and the Financial Planning Coalition, “this study demonstrates that the commission still has a lot of work to do to refine the disclosures if they are to fulfill their intended purpose of ending investor confusion and supporting informed decision-making,” according to Roper.

The RAND report produced the following general findings:

  • The survey respondents were generally positive about the format and content of the Form CRS.
  • Nearly 90% of the survey respondents said the Form CRS would help them make more informed decisions about investment accounts and services.
  • More than three out of every four survey respondents agreed with statements characterizing the Form CRS as helpful for understanding key terms and conflicts of interest and as serving as the basis for a conversation with an investment professional.
  • Interview participants also said the Form CRS improved their understanding, but interview discussions revealed there were areas of confusion, including differences between types of accounts or financial professionals.
  • Opinions of survey respondents with less education or less investment experience were less positive, but opinions for all groups were still generally positive.
  • Around 85% of survey respondents found the side-by-side comparisons to be helpful in deciding between a broker-dealer and an investment advisor.
  • Almost all the respondents who reported that they would be likely to read any documents when choosing a financial professional or account type said they would read the Form CRS.
  • Most of the survey respondents said the Form CRS is too long.
  • Perceived to be most helpful is the information on fees and costs in the Form CRS, yet it is also considered the most difficult to understand among the content.
  • Among current and potential “key questions to ask,” questions concerning fees and costs generated the most interest.
  • Interview participants said the “Fees and Costs” section is overwhelming but could benefit from adding details about possible fees for the client. Interview participants were confused about fees being negotiable.
  • Survey responses indicated that the “Relationships and Services” and “Our Obligations to You” sections were the second and third most likely to be chosen as informative sections. Interview participants also viewed these sections favorably, but they had difficulty reconciling the information provided in the “Our Obligations to You” section and the “Conflicts of Interest” section.

Roper says “the most significant findings … come from the in-depth, qualitative interviews,” which are discussed in the report.

“It is there that we see how investors struggle to understand – and often misunderstand – the information being disclosed. This shows the danger of relying on investor surveys to determine disclosure effectiveness,” she says.

Jay Clayton

For example, on the survey conducted for this study, nearly 90% of the respondents said the Form CRS would help them make more informed decisions about investment accounts and services.

But Roper points out that in the in-depth interviews, according to the report: “Misunderstanding was demonstrated in two ways. First, some people understood discrete sections of the Relationship Summary, but when questioned at the end of the interviews, they did not appear to have synthesized the information and be able to apply it ... Others seemed to misunderstand the differences between account types and financial professionals from the beginning, never fully grasping it.”

And that particular interview finding relates to the relatively straightforward question regarding differences in services offered within brokerage and advisory accounts, according to Roper.

“You see even less understanding regarding key differences in the legal obligations or how those obligations relate to conflicts of interest,” she says.

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