From disclosure to discourse: Lessons from Canada’s Radical New Approach to Disclosure Can Help Advisers Build Client Trust

CRM2 and disclosure

Guest column for IAA Investment Adviser Assoc. Newsletter, November 2016.
By Susan Silma, Co-founder of CRM2 Navigator

There’s a common misconception about disclosure: the belief that by simply sharing complex information with people, they will understand and retain it. But that’s not usually the case.

Think of your own experience with disclosure. When was the last time you read all of the disclosures related to an investment? Or even reviewed the entire Terms and Conditions for an iTunes download before simply clicking ‘Agree’?

Disclosure on its own doesn’t work

When it comes to disclosure, the financial services industry is well-motivated. It wants investors to be educated, protected, and equipped with the right tools to make investment decisions. Disclosure is the basis for the regulation of financial services. The intent is admirable – but long, complex and acronym-laden documents entirely miss the mark.

The truth is that disclosure, by itself, neither educates, protects, nor provides adequate tools for investors. To do these things, people would have to both read and understand the disclosure.

It won’t surprise anyone to know that the vast majority of investors don’t read the disclosure documents that firms produce as they find the documents intimidating and impenetrable. Academic research, as well as our own industry research, shows that, even when they’re forced to read disclosure, people find it confusing and unhelpful.

Most people find disclosures complex, obscure, and dull … find they can safely ignore most disclosures ... so many are mandated that nobody could heed them all.
Omri Ben-Shahar and Carl Schneider, More Than You Wanted to Know – The Failure of Mandated Disclosure

As a result, the traditional approach to disclosure is not working. Is there a better approach that would actually inform investors and help them be more prepared to make knowledgeable decisions about their investments and financial future? How can representatives and their firms provide more effective disclosure and true transparency to build client confidence and trust, and deepen relationships?

A radical new approach to disclosure in Canada

In Canada, securities regulators have embarked on a radically new approach to disclosure. A regulatory initiative called the Client Relationship Model, Phase 2 – referred to as CRM2 – is now in the final stage of implementation and is already having a major impact on the Canadian financial services industry.

CRM2 requires all dealer firms in Canada (this would be Investment Advisers and Broker-Dealers in the U.S.) to provide investors with personal information about the cost and performance of each of their investment accounts. Every investor will receive specific information about the change in value of their account over the past year, and rates of return over various periods. In addition, they will see, in dollars, what they paid directly, and through embedded fees and other third party fees. 

Although the regulation is “principles-based” and does not mandate specific wording or format, the regulators require that the information be provided in text, as well as tables and charts. They have acknowledged that people learn differently, and that many are visual learners. 

Most investors have not yet received their cost and performance information, but already a number of dealer firms are anticipating negative client reactions and have already reduced their fees for advice and for some investment products (including mutual funds and ETFs).

We are doing disclosure as a regulatory move all over the board. The funny thing is, we are doing this despite very little evidence of its efficacy. Adam J. Levitin, a law professor at Georgetown

The origin and intent of CRM2

Let’s look at the origin and intent of the CRM2 regulations. The regulators developing CRM2 conducted research with investors about their investment knowledge and needs. They knew that investors receive a great deal of disclosure about investments – they wanted to find out what information was most important to investors and whether they were getting it.

The research indicated that investors had two main questions about their investments: How am I doing? and What is it costing me? Despite all of the disclosure and data they receive, they did not have satisfactory answers to those questions. Regulators developed CRM2 to provide transparency and clarity for investors about the cost and performance of their investments – and to help answer those two questions.

U.S. investors expect greater transparency

Although CRM2-like regulations aren’t currently under consideration in the U.S., they are still very relevant to the U.S. market. Many of the issues that CRM2 is trying to address echo the findings of the recent Edelman/CFA Institute global survey of what investors want*.

U.S. investors also crave transparency and forthright communication about fees and conflicts of interest, in particular. They want easily digestible investment reports that go beyond required boiler-plate disclosure and provide next-generation transparency and clarity. In the Edelman/CFA Institute study, five of the 11 “essential” attributes that are important to investors when working with an investment firm relate to transparency and open communication*.

It makes sense that these issues cross borders. Accordingly, representatives in the U.S. should leverage the insights gleaned from the CRM2 approach to disclosure to engender greater trust among their clients and grow their business.

U.S. approach is already starting to change

Private wealth advisers indicated in a recently conducted poll among readers of CFA Institute Financial Newsbrief** that their top concern was “winning and maintaining clients’ trust.”

Already many U.S. firms and their representatives have adopted a more transparent approach to disclosure as a calculated business move to build client trust, reinforce confidence and deepen relationships. These firms recognize the power of getting out in front of inevitable regulatory changes.

Perhaps more importantly, these firms are taking a leadership stance and positioning their firms for success by delivering what investors have clearly said they want – greater transparency and open communication.

Three principles of effective disclosure

1. Less is more.  At CRM2 Navigator, we have done extensive research and document testing with investors. Common reactions as investors read a paragraph of regulatory text include: “I stopped reading after the second line” and “I don’t have a clue what this means”.  To effectively communicate a piece of data or information:

  • Focus on the information you are trying to communicate and make it stand out. Eliminate extraneous information.
  • Take a “layered” approach to disclosure – prioritize the information you want to communicate, and put it up front. Leave the rest (including the disclosure required to tick the regulatory boxes) in the back – and just accept that it will likely not be read by most people.
  • Keep it short – try to capture all the relevant information in just a couple of pages.

2. Talk to clients about what matters to them.  In industry, we focus on issues from a different perspective than our clients. Be sure you know what information clients seek to understand, and if you don’t know what they want, ask them.  

  •  Look at content from the client perspective and focus on what matters to them.
  • Communicate with clients in terms they understand.
  • Avoid industry jargon and acronyms.

3. Communicate effectively with information design. In general, this is the practice of presenting information in a way that fosters efficient and effective understanding. The Canadian regulators recognized that many people are visual learners, so the CRM2 information must be provided in tables and charts, as well as text. 

  • Incorporate graphic design elements (including tables and charts) into the information presented.

  • Use tables and charts to focus the reader on key elements that might otherwise get buried in long pages of text. 

Impact on investors

In Canada, we’re in the final phase of CRM2 implementation, so we don’t yet know the full impact of the new cost and performance information on investors. For some clients, the enhanced reporting will be a non-event. They feel they’re getting good service and know they’re paying fees for it.

However, many clients are unaware of what they’re paying. Data indicates that a full 75 percent don’t understand the commissions and fees they pay and 50 percent believe they don’t pay any fees at all††. In that case, sticker shock over fees may be the result.

Whether or not clients are surprised by the fees they pay, it’s clear that the new reporting will lead some to wonder what they get for those fees. This makes it imperative that representatives be able to demonstrate and articulate the value they provide.

Representatives must demonstrate their fee-worthy value

In the face of increased transparency around fees and performance, representatives must be prepared to justify the value of their service and advice to retain client confidence. They need to not only have a solid value story, but also to identify the fee-worthy value that they have provided for the fees that clients paid. This will include both the tangible things clients see, as well as the intangible things that happen behind the scenes.

With the looming fee disclosure in Canada, we have been advocating that dealer firms and their representatives be proactive – start talking to clients in advance about the fees they pay and what they receive for those fees.

We also stress the importance of having comfortable, confident conversations with clients about their fees, performance and the value they receive from their representative. We recommend this for all representatives, whether or not fee disclosure is imminent.

Build trust through effective disclosure

Perhaps surprisingly, once you effectively disclose the fees that clients pay, studies have shown that, rather than scaring off your clients, their trust and confidence levels actually go up. Clients appreciate the honesty and transparency.

 Disclosure can be effective and compliance can be client-friendly. But we have to start by thinking about disclosure differently – by going beyond just ticking the regulatory box. As an industry we need to work harder to focus on effective disclosure, on delivering the information that clients want to know—information that is meaningful, relevant and easy to understand.

Increased transparency in the financial services industry will only continue, either through regulation or led by forward-thinking firms. It is essential that firms and their representatives embrace the principles of effective disclosure and incorporate them into their approach to client communication. By transforming complex disclosure into comfortable, confident conversations about fees, performance and the value a representative provides, firms can increase client trust and confidence, and drive future growth.


For more information about building client trust with CRM2, visit CRM2 Navigator.

FOOTNOTES: * “From Trust to Loyalty: A Global Survey of What Investors Want,” Edelman/CFA Institute 2015  ** 2016 poll among readers of CFA Institute Financial Newsbrief  J.D. Power, Canadian Full Service Investor Satisfaction Study, 2015††  CRM2 Navigator online survey of mutual fund investors 2015