What if …. We Tell Investors the Truth – Part Two
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This is part two of a three-part series of articles on disclosures and investor protection.
Last month I entered a minefield when I wrote that a main tenet of conventional wisdom of retail investor regulation and disclosure is all wet. This “wisdom?” “Investor confusion” is the problem that plagues regulators, and investors are at fault.
This wisdom is wrong.
Common sense and research prove this. However, unclear or misleading language and information confusion is the chief culprit that prevents form CRS disclosure from being effective. (Form CRS is the disclosure that SEC-registered investment advisors are required to provide to clients.)
As I and my co-authors argue here, the SEC has a unique opportunity to redo form CRS to help investors and investment professionals better understand how broker-dealers and investment advisers differ.
In 2018 the SEC crafted form CRS as a disclosure to explain differences between broker-dealers (BDs) and investment advisers (IAs). The disclosures were independently tested by the Kleimann Group, a company with expertise in authoring consumer disclosures. How did the disclosures do?
They failed miserably.
Kleimann revised the language and conducted in-depth interviews with investor participants in three cities. Suddenly, investor understanding shot up. The results were revealing.
The disclosures describe BDs and IAs regarding services and relationship, fees, obligations and conflicts. Here is what the tests showed: