advisor with client

The use of the phrase “full disclosure” has crept into everyday language. It’s typically used as a precursor to sharing confidential, personal and sometimes negative messages. The notion that a conflict of interest might exist that has not been “fully disclosed” can make for an uncomfortable conversation. In fact, the overuse or perhaps misuse of this phrase has earned it a top position on Inc. magazine’s list of words and phrases that should be banished from professional vocabulary.

In the sphere of wealth compliance and investor communications, full disclosure takes on a very different meaning. As discussed in a Forbes article I referenced in a previous column on trust, disclosure and technology, “self-disclosure is one of the hallmarks of close relationships, the essence of personal candor and of trust in the other party. Showing your strengths is easy, but revealing your vulnerabilities, weaknesses and failures feels risky. It may be a risk worth taking.”

Disclosure has become a guiding principle in wealth management compliance reform following the 2008 crisis. Regulators in most modern financial economies prioritize the disclosure of fees, conflicts of interest, product attributes and the rationale for recommending a product. In Canada, the Client Relationship Model (CRM2), Point of Sale (POS3) and pending Client-Focused Reforms (CFR) are examples of significant regulatory wealth reforms in the last decade focused on increased investor disclosure. In the United States, Regulation Best Interest (Reg BI), viewed as the most significant wealth reform since the 1930s, is also founded on the principle of investor disclosure. Many regulatory experts believe that investor protection is only achieved when there is full disclosure.

Beyond the mandatory disclosures required by regulators, how should an advisor think about disclosure as a competitive advantage? We believe there are four factors at play: materiality, relevance, timeliness and simplicity. Advisors who successfully navigate these factors will turn “full disclosure” into an investor engagement opportunity.

While materiality and relevance are in the eye of the beholder — or, in this case, the investor — there are practical considerations when sharing compliance data. A CFA Institute survey on investors’ perspectives on financial disclosure highlighted a gap between the two parties in the disclosure relationship: “preparers tend to equate the number of pages in the financial statements with transparency, whereas investors do not believe disclosures are sufficient.”

Materiality and relevance are more important to the investor than the volume of data. Rather than creating a mountain of paperwork and endless hours of reading, frictionless, relevant disclosure is critical. Recent regulatory reforms, specifically the creation of fund facts and summary prospectuses that provide investors with a condensed document in plain language, have helped move the needle on this challenge. When advisors and firms consider both required and optional disclosure to investors, materiality and relevance should be at the forefront of their decisions.

The timing of compliance disclosure has dramatically changed in the last five years. In Canada, POS3 moved the product disclosure requirement from post-sale to pre-sale. While this change seemed radical at the time, it ensured that the investor was informed at the appropriate stage of the decision process — prior to purchase. Relationship Disclosure Information (RDI) and other enhanced pre-sale disclosure will come into effect with the CFR in Canada on December 31, 2021. Similar pre-trade disclosure — specifically the delivery of the Client Relationship Summary (CRS) — has been in place with Reg BI in the U.S. since June 2020. While these disclosures are mandatory and codified in the regulations, other regulatory requirements such as documenting account type determination and investment analysis (including assessing “reasonably available alternatives”) are optional from a client disclosure standpoint.

Many of our clients believe that sharing relevant aspects of this information with their investors will achieve two objectives: increased trust and reduced compliance risk. Deloitte’s Global Compliance and Innovation Trends in Wealth Management report commented: “More broadly, [firms] also need to document the entire advisory process; to guarantee full disclosure from the beginning, they need to make sure that the investment time horizon, fee set-up and product selection take place during client onboarding. This means that firms should equip themselves with digital tools that automate tracking and auditing processes and offer enhanced reporting and profiling features with intelligent business rules by design.”

From a simplicity standpoint, disclosures must cater to the individual needs and desires of the investor. The use of digital channels has increased significantly during the pandemic and most experts believe this trend is unlikely to reverse. Catering to the unique communications channel choices of your investors — be they digital, physical or in-person — will simplify the disclosure process and drive higher engagement.

Another important consideration is that less is often more. While advisors may have limited input on the content of regulatory disclosures, sharing relevant and clear summaries of your investment analysis will drive higher engagement. In a recent conversation with one of our clients, an advisor commented on sharing his “reasonably available alternatives” analysis with his client, stating: “I love the simplicity of it — if you get too far into modern portfolio theory with some clients, their eyes can glaze over. This analysis is simple and intuitive.”

Turning disclosure into a competitive advantage starts by recognizing that effective disclosure builds trust in any relationship. Strong technology supports this process by analyzing and assigning materiality to the massive volume of investment product changes. Digital compliance platforms facilitate timely, simplified disclosures, driving higher levels of investor satisfaction.