How to improve CRM2 statements

As regulators aim to improve investor outcomes with initiatives such as the client-focused reforms, measuring the success of regulation already in place can identify areas for improvement. A new report from the Investment Funds Institute of Canada (IFIC) and BEworks sheds light on the success of CRM2 disclosure and offers suggestions for better investor outcomes.

IFIC’s 2018 mutual fund investor survey found a 10% decrease in the proportion of investors who said their annual fee and performance reports were easy to understand. “We can do better,” said Paul Bourque, IFIC’s president and CEO, in a webinar Wednesday that outlined the new disclosure findings.

IFIC teamed with BEworks, the Toronto-based behavioural economics consulting firm, to explore how behavioural economics principles can enhance fee and performance reporting.

The firm interviewed industry stakeholders in Canada, the U.S., and Europe, and audited CRM2 statements submitted by IFIC dealer members.

The audit found CRM2 statements varied in length from two to 20 pages, contained jargon and technical language, and included text at the reading level of a college graduate—much beyond what’s required for investor comprehension.

The research identified standard practices for disclosure, such as using simple language, chunking thematic information and presenting information visually. For example, with traffic-light labelling, goals that align with behaviour appear as green and non-goal-aligned behaviours appear as red. These practices were found to work repeatedly in multiple contexts.

The report also identified innovative disclosure practices—higher-risk tactics that are context dependent. These include making a link between goal-relevant information and investor behaviour, such as including an investor checklist with concrete action items.

The firm conducted a trial with investors to test behaviourally informed statements—what the firm refers to as “BE statements”—against a model CRM2 statement created by IFIC that was representative of the statements submitted by dealers. The BE statements used both standard and innovative disclosures practices.

Trial results reveal areas for improvement

Investors who viewed the BE statements more accurately answered questions that assessed detailed comprehension—questions about rates of return, for example. These investors were also more confident about their understanding of the statements.

There was no significant difference in investor comprehension of BE statements that used standard versus innovative disclosure practices. However, investors who viewed BE statements with goal tracking (an innovative tactic) reported they planned to contribute more and withdraw less from their accounts in the next year.

This effect is notable, the report says, because the statement with the goal-tracker also contained a pricing transparency diagram showing how fees can compound over time and lower returns. Thus, the risk that pricing transparency might lead investors to engage in short-term, fee-focused thinking appears to have been successfully offset by other tactics in the statement.

“Bundling behavioural tactics together can help mitigate the risks of providing merely more information about fees,” said Kelly Peters, CEO and co-founder at BEworks, in the webinar.

The report notes that the finding is important as the industry moves toward total cost reporting.

The model CRM2 statement was superior in one aspect: investors who viewed it more accurately answered questions about basic comprehension, such as rate of return and range of total fees paid (as opposed to detailed comprehension, such as fee types and how rates of return are calculated). The finding is “somewhat unexpected,” the report says, hypothesizing that investors remembered basic aspects of the report because it was familiar to them.

“We expect that if implemented, investors would soon become familiar with the structure of the BE statements, and show equal if not superior memory for them,” it says.

In general, the model CRM2 statement performed well over a variety of measures, but the BE statements enhanced investor outcomes.

As next steps, the report recommends dealers review their CRM2 statements and look for opportunities to apply BE tactics to simplify content. This could include reducing the amount of text, presenting bullet points of salient information near the top left-hand corner of the page, applying traffic-light labelling and implementing goal tracking.

These types of improvements align with the report’s findings. “Even relatively minor changes to language and graphics have a significant and positive impact on investors’ detailed comprehension of their statements and their intentions to take action in service of achieving their goals,” it says.

Bourque said IFIC’s “looking to operationalize” some of the report’s recommendations, “for example, developing enhanced model reports that advisors and firms could use to facilitate effective client conversations.”

For full results, including the audit of submitted CRM2 statements and the sample BE statements, read the report from IFIC and BEworks.

About the investor trial: BEworks recruited 2,597 Canadians, with an average age of 51. Participants had a minimum of one investment product (e.g., mutual fund, stocks, bonds) and one year of experience as an investor.

Also read:

Millennials understand fees better under CRM2: BCSC

Why advisors should stop talking and start coaching

How client awareness of CRM2 benefits advisors