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 in 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 receiving 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 CRM2-mandated 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 pre- existing gap between so-called “more confident” and “less confident” investors. The more confident investors 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.

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