A new report concludes that the Security and Exchange Commission’s proposed Customer Relationship Summary (CRS) needs more work.
The news wasn’t all bad for the SEC. The sponsors of the report – the Consumer Federation of America, AARP, and the Financial Planning Coalition (comprised of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors) – note that “despite the current draft’s shortcomings,” the study‘s author (Kleimann Communications) conclude that “a usable document that communicates clearly and well with potential investors is a viable outcome.”
That said, the current CRS had plenty of shortcomings, at least from the perspectives drawn from 90-minute, one-on-one interviews with a total of 16 investors with a variety of educational and income levels in three communities:
- Calabasas, CA (a small affluent suburb);
- Philadelphia (large, mixed income city); and
- a "middle-income suburb" of St. Louis, MO.
“Overall, participants had difficulty throughout the proposed Customer Relationship Summary (CRS) with sorting out the similarities and differences between the Broker-Dealer Services and Investment Adviser Services,” the report begins.
The 38-page report outlines a number of areas (and provide quotes) in which the study participants struggled to understand, misunderstood, but also sometimes understood the information presented in the CRS. For example, nearly all the participants “easily identified” a key difference between the Brokerage Accounts and Advisory Accounts as the fee structure either being tied to transactions or assets. On the other hand, the study authors caution that “participants were quite mixed in their understanding about the advice and monitoring that was offered in the two accounts, some assuming that the advice and level of monitoring was the same.” And yet, “some participants assumed that the client would get more services in an Advisory Account because of the quarterly fee.”
The report notes that while participants “expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account,” they were “surprised by the proliferation of additional fees.”
And while most participants “would skip the Additional Information section because they misunderstood the point of the section,” nearly all saw the “Key Questions as essential,” felt the questions were straightforward, and raised important questions that they themselves might not have thought to ask. And “many” said they would use that list of questions in their next exchange with their advisor – but “few thought the questions were fully addressed” with the CRS.
“We want to be clear,” the report concludes. “We understand that the topic is complex. It is intrinsically filled with concepts and vocabulary that are unfamiliar to many. We also understand that the document we were testing is an initial draft. That said, in our testing, we saw very few participants who were able to integrate and synthesize the information into a deep comprehension of the differences between the Broker-Dealer Services and the Investment Adviser Services. In fact, we saw few participants who were able to consistently comprehend the information within a single section.”
Much of the actual study was couched in descriptions like “most” and “some.” However, the letter to SEC Chairman Jay Clayton that accompanied the report was arguably more “pointed.” The key findings highlighted there were:
- The overall level of comprehension was poor (explaining that the testing was done using a method that required participants to read the disclosures “more carefully than most would on their own”).
- Participants did not understand key differences in the nature of services provided.
- Most participants did not understand disclosures regarding legal obligations.
- Participants were deeply confused by the disclosure of fees and costs.
- Participants understood the existence, but not the import, of conflicts of interest.
Ultimately, the study’s sponsors called on the SEC to “reexamine the CRS and postpone steps to finalize the Regulation Best Interest regulatory package until the issues with the CRS have been resolved.”