The need for comprehensible, engaging and durable financial information for retail investors has never been greater.
Many Canadians need to supplement government or employee pension plans with personal savings to meet their retirement goals. Mutual funds and ETFs are a critical component to these savings and account for 38% of Canadians’ financial wealth, according to a recent report from Strategic Insight.
But the Canadian marketplace for investment fund products is becoming increasingly complex, as are the regulations directing market participant financial disclosure for investors.
Thus, effective disclosure plays a critical role in providing investors with the awareness and understanding they need to make investment decisions confidently that are aligned with their investment goals.
Without question, financial disclosure through the second phase of the client relationship model 2 (CRM2) is becoming a powerful investor information tool. The Investment Funds Institute of Canada (IFIC) has recently commissioned research to evaluate and test the effectiveness of CRM2 statements experimentally — as well as to examine if insights from behavioural economics can drive improvement in how information is shared with investors.
What more can behavioral economic insights tell us about how investors access, understand, retain and act upon financial advice, information and disclosure? How can we better equip investors to make decisions in their own best interests? We don’t yet know the answer to these questions, but we do know that seeking the answers is important.
Regulators and the investment funds industry have begun conducting investor surveys to measure the impact of the CRM2 reports on investor awareness and understanding of fees. According to research the B.C. Securities Commission (BCSC) conducted during the past 16 months, CRM2 fee reports are making a difference.
When investors were shown their fees through disclosure, almost 60% of clients with a low level of confidence in investing, or low investment knowledge — in other words, investors who rely heavily on an advisor to make sure they can meet their financial goals — changed their behaviour.
Meanwhile, among the segment of the investor population with high financial literacy and confidence, 25% changed the way they engaged with their advisors, 40% changed their fee arrangement or mix of products and 17% changed their firm or advisor.
A key takeaway from IFIC’s 2018 Canadian Mutual Fund Investor Survey is that despite positive results in some areas related to the understanding of fees among investors, there’s room for improvement.
These results underscore the importance of continuing to focus on improving the effectiveness of disclosure. This work is especially relevant as regulators and the industry begin to work toward full cost disclosure to include not only the cost of distribution and advice in annual statements, but also the ongoing management and operational costs associated with owning investment products.
IFIC’s behavioural economics research is intended to provide the industry, regulators and other stakeholders with the theoretical basis and practical tools for the continued improvement of cost and performance reporting.
The research will involve running a randomized trial experiment to see what kind of tactics can be embedded into these statements to improve their impact — exploring concepts such as goal-framing, personalization and enhanced visualization of fee and performance data, for example.
One of the goals of the research is to identify and address some of the biases that impede how CRM2 statements are read and interpreted by investors.
Evidence shows that disclosure, done well, can result in more informed investors who are more comfortable with making investment decisions. Providing investors with clear and timely information, in a format that is proven to be effective, can only lead to better investor outcomes. That’s an objective all industry stakeholders certainly share.