CRM2 re­ports fail to de­liver

New re­search ques­tions the ef­fec­tive­ness of en­hanced dis­clo­sure

Investment Executive - - FRONT PAGE - BY JAMES L ANGTON

as reg­u­la­tors,the in­vest­ment in­dus­try and in­vestor ad­vo­cates con­tinue their seem­ingly end­less de­bate over fur­ther re­forms aimed at in­vestor pro­tec­tion, new re­search from the B.C. Se­cu­ri­ties Com­mis­sion (BCSC) re­veals that new dis­clo­sure to in­vestors may not be hav­ing the in­tended im­pact.

The BCSC pub­lished a re­port ear­lier this month de­tail­ing the re­sults of the lat­est phase of a three-part study con­ducted by In­no­va­tive Re­search Group Inc. That sur­vey polled in­vestors in Bri­tish Columbia to ex­am­ine the im­pact of the new cost and com­pen­sa­tion re­ports that now are pro­vided to in­vestors un­der the sec­ond phase of the client re­la­tion­ship model (CRM2) re­forms.

Al­though these re­ports have just be­gun to cir­cu­late (firms have been re­quired to start pro­duc­ing them only since the end of 2016), the re­search hints at the real-

world lim­its of re­ly­ing on dis­clo­sure to ad­dress gaps in in­vestors’ knowl­edge about the fees they pay, and to en­cour­age in­vestors to act upon that knowl­edge.

To be­gin with, the re­port in­di­cates that 19% of in­vestors in B.C. said they haven’t re­ceived the new CRM2-man­dated re­ports. That shouldn’t be the case, given that the lat­est phase of this re­search was car­ried out in June of this year. So, ei­ther firms are fail­ing to meet their obli­ga­tions or in­vestors are re­ceiv­ing the re­quired re­ports, but aren’t read­ing them or don’t un­der­stand the con­tent. What­ever the rea­son, the bot­tom line is that a rel­a­tively high pro­por­tion of in­vestors still aren’t re­ceiv­ing ef­fec­tive dis­clo­sure about their costs of in­vest­ing.

Among in­vestors who were aware of re­ceiv­ing the new re­ports, the dis­clo­sure doesn’t ap­pear to be prompt­ing a lot of pos­i­tive ac­tion. Al­though the sur­vey found that some in­vestors un­der­stand their fees bet­ter than they did be­fore re­ceiv­ing their re­ports, those in­vestors whose knowl­edge im­proved the most tended not to act on it.

Fur­ther­more, the re­search found that the added knowl­edge is short-lived i n some cases. Specif­i­cally, the re­search found that in­vestors char­ac­ter­ized as “less con­fi­dent” — who tend to be younger, less af­flu­ent and less en­gaged in in­vest­ing — en­joyed more sig­nif­i­cant in­creases in their knowl­edge about fees af­ter re­ceiv- ing the CRM2 re­ports. How­ever, these in­vestors were less likely to act on their new­found knowl­edge com­pared with “more con­fi­dent” in­vestors. The study also found that this added knowl­edge did not nec­es­sar­ily per­sist over time.

In­deed, for in­vestors who were sur­veyed in March and April, then again in June, un­der­stand­ing of fees rose ini­tially in the wake of re­ceiv­ing their CRM2-man­dated re­ports, only to de­cline just a cou­ple of months later. The re­port notes that “many” of those who re­ported in­creased knowl­edge sub­se­quently saw that gain re­verse over time. “Clearly, knowl­edge fades,” the re­port notes.

Even be­fore in­vestors suf­fer that de­te­ri­o­ra­tion in their knowl­edge, the study found that “less con­fi­dent” in­vestors, who seem to be the big­ger ben­e­fi­cia­ries of the CRM2 re­ports, also were less likely to act on their en­hanced un­der­stand­ing — whether by com­mu­ni­cat­ing with their fi­nan­cial ad­vi­sors about fees or per­for­mance; mak­ing changes to their port­fo­lios or ac­count struc­ture; or by chang­ing firms or ad­vi­sors. “Most [sur­vey par­tic­i­pants] did not fol­low through on their in­ten­tions to act,” the re­port states.

Over­all, in­vestors’ un­der­stand­ing of fees in­creased by about 15 per­cent­age points fol­low­ing re­ceipt of the CRM2-man­dated re­ports, the study found. The pro­por­tion of in­vestors who said they’re fa­mil­iar with the di­rect fees they pay rose af­ter CRM2­man­dated re­port­ing took ef­fect — as did their fa­mil­iar­ity with em­bed­ded fees.

This en­hanced un­der­stand­ing of fees was most ev­i­dent among in­vestors with smaller port­fo­lios and “less con­fi­dent” in­vestors in gen­eral, the re­search found. Yet, this in­crease in knowl­edge did not close the pre­ex­ist­ing gap be­tween so-called “more con­fi­dent” and “less con­fi­dent” in­vestors. The more con­fi­dent i nvestors knew more about fees be­fore the CRM2-man­dated cost dis­clo­sure — and con­tin­ued to know more af­ter the new re­ports were pro­vided.

These con­fi­dent in­vestors also were more likely to fol­low through with some sort of ac­tion with their ad­vi­sors af­ter re­ceiv­ing their CRM2-man­dated re­ports. Al­though the less con­fi­dent in­vestors re­ceived a big­ger boost in un­der­stand­ing about fees, most didn’t do any­thing with the in­for­ma­tion..

For ex­am­ple, among “more con­fi­dent” in­vestors who pro­fessed be­ing “very likely” to take ac­tion af­ter re­ceiv­ing their CRM2-man­dated re­ports, their fol­low-through was much greater. The sur­vey found that 60% of these in­vestors talked with their ad­vi­sors about per­for­mance, 46% talked with their ad­vi­sors about fees and more than a third ei­ther changed their prod­uct mix or fee ar­range­ments, or switched firms or ad­vi­sors.

No­tably, the in­vestors with the largest ac­counts proved most mo­ti­vated to make changes af­ter re­ceiv­ing their CRM2-man­dated re­ports. In fact, al­though 15% of in­vestors with port­fo­lios of at least $500,000 re­ported mak­ing changes to their fee ar­range­ments in the year prior to re­ceiv­ing their CRM2 re­ports, that pro­por­tion rose to 26% by June of this year. In ad­di­tion, al­though just 8% of these in­vestors re­ported switch­ing firms or ad­vi­sors as of Novem­ber 2016, that per­cent­age surged to 20% by June 2017.

Still, these in­vestors weren’t nec­es­sar­ily act­ing from a po­si­tion of greater knowl­edge about the fees they were pay­ing. In fact, the sur­vey found that, for 47% of in­vestors with port­fo­lios of at least $500,000, their knowl­edge of their spe­cific fees ac­tu­ally wors­ened be­tween Novem­ber 2016 and June 2017. Dur­ing that pe­riod, knowl­edge of fees stayed the same for 30% of in­vestors with at least $500,000 in in­vestible as­sets and im­proved for just 23% of in­vestors in the same as­set range.

In­deed, knowl­edge of fees de­clined for al­most a third of in­vestors over­all be­tween Novem­ber 2016 and June 2017, de­spite them re­ceiv­ing the CRM2-man­dated re­ports.

This ap­par­ent dis­con­nec­tion be­tween in­vestor knowl­edge and ac­tion also was ev­i­dent among in­vestors who viewed an ed­u­ca­tional video in ad­di­tion to re­ceiv­ing their CRM2-man­dated re­ports. The sur­vey found that in­vestors who viewed the video in­tended to act, but their ac­tual fol­low-through rate was lower than that of in­vestors who didn’t view the video.

In fact, the study found that only 24% of in­vestors who said they were “very likely” to talk to their ad­vi­sor about fees af­ter view­ing the video fol­lowed through on that in­ten­tion. By com­par­i­son, 49% of those who said the same thing with­out see­ing the video talked to their ad­vi­sor about fees af­ter re­ceiv­ing their CRM2-man­dated re­port.

So, it ap­pears that al­though an added prompt to ac­tion from reg­u­la­tors, such as an ed­u­ca­tional video, may boost in­vestors ini­tial in­ten­tion to act, that in­tent evap­o­rates quickly.

The Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors plans to con­duct a big­ger study of the ef­fects of CRM2-man­dated re­port­ing, al­though the re­sults of that aren’t ex­pected un­til 2021.

In the mean­time, the re­search in B.C. high­lights how sim­ply boost­ing dis­clo­sure may be a rel­a­tively weak rem­edy for fun­da­men­tal in­vestor pro­tec­tion prob­lems be­cause in­vestors of­ten don’t ab­sorb or act upon more com­pre­hen­sive dis­clo­sure.

New re­search re­veals in­vestors of­ten don’t ab­sorb or act upon bet­ter dis­clo­sure

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