SEC Road Tests Relationship Summary

The Securities and Exchange Commission has road tested its proposed Relationship Summary with investors — with some interesting (and not wholly surprising) results.

A key component of the SEC’s proposal designed to address investor confusion about their advisory relationships is the Form CRS Relationship Summary, which registered investment advisers, registered broker-dealers that serve retail customers and dual registrants would be required to deliver to investors.

The SEC tapped RAND Corporation to conduct the investor testing, including a nationwide online survey of more than 1,800 individuals fielded through RAND’s nationally representative “American Life Panel,” as well as qualitative in-depth interviews conducted in Denver and Pittsburgh by independent market research firms.

The survey questions covered the following subject areas:

  • Opinions about the length, importance, and ease of understanding of each section of the Relationship Summary — that is, the six sections describing relationships and services, obligations, fees and costs, conflicts of interest, additional information, and questions to ask.
  • Preferences on the format and delivery of the Relationship Summary, such as the question-and-answer format, side-by-side comparison, links to web pages, and the mode and timing of delivery.
  • Comfort level with and likelihood of asking key questions.
  • Likelihood of looking up disciplinary history.
  • Opinions about the usefulness of the Relationship Summary, including in comparison to “longer documents (such as an investment adviser’s Form ADV or a broker-dealer’s account opening agreement).”

That process produced a 122-page report that outlines the approach and the findings regarding the Relationship Summary.

The “Fees and Costs” section of the CRS was described as “notable” for being the most likely to be selected as one of the most informative sections (73%) and least likely to be selected as one of the least informative ones (11%) — a pattern that Rand noted was strongest among those who reported having more involved types of investment accounts, such as a non-employer-sponsored retirement account or other investment account (81% most informative versus 5% least informative), whereas the pattern is not as strong for other investors. Indeed, the “Fees and Costs” section was more likely to be selected as one of the most informative and less likely to be selected as one of the least informative by those with more education.

That said, while the “Fees and Costs” section appeared to be considered the most informative, it is also the section for which the largest share of respondents suggest adding more detail and the largest share find it to be either difficult or very difficult to understand.

Interestingly enough, the “Conflicts of Interest” section was more than twice as likely to be selected as one of the two least informative sections (36%) than as one of the two most informative ones (15%) — a differential that Rand says holds for almost all of the population subgroups analyzed.

In fact, the “Conflicts of Interest” section was second only to the “Fees and Costs” section in terms of reported difficulty. About one-third of respondents found the “Conflicts of Interest” section to be either difficult or very difficult to understand — with investors more likely to perceive difficulty (35%) than noninvestors (30%). However, the report notes that the differential between investors and noninvestors appears to arise where investors who did not report receiving financial advice were more likely to find this section to be difficult to understand (39%) than were either investors who did report receiving advice (30%) or noninvestors (30%).

While nearly half (47.8%) of respondents suggested keeping the section length as is, the report states that the “majority of the remainder suggest shortening (28.3%) or deleting (2.2%) rather than adding more detail.” True enough, and yet, that “majority of the remainder” consisted of 28.3% who suggested shortening it, just 2.2% who suggested deleting it, and 22% who said that more should be added. The share who suggested adding more detail here was second only to the “Fees and Costs” section (22% versus 30%).

The “Additional Information” section was cited most frequently as one of the two least informative sections (66%), nearly doubling the percentage citing any other specific section, according to the report. In fact, this section was selected as one of the least informative by a majority of members of each investor and education subgroup.

Ironically, the “Key Questions to Ask” section was more than twice as likely to be selected as one of the two least informative sections (36%) than as one of the two most informative ones (14%) — a differential that held for every investor and education subgroup analyzed. The share selecting it as one of the most informative increases with education level — but not by much. The report explains that while the survey responses do not indicate that the “Key Questions to Ask” section is particularly informative, only about one-quarter of respondents suggested that it should be shortened or deleted, and only 11% found it difficult to understand. Of course, this section merely suggests questions to ask; it does not provide answers to them.

The SEC notes that this report may be informative to those evaluating the proposed Relationship Summary, and that it may supplement other information considered in connection with the final rule. The Office of Investor Advocate is making this report available to allow the public to consider and comment on this supplemental information — encouraged by Dec. 7, 2018.

Additional information is at https://www.sec.gov/news/press-release/2018-257.

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