Experts in consumer affairs, communications and design strategies told the SEC’s Investor Advisory Council on Thursday that disclosures that are simple, appealing and in the right format would be more effective for investors.
The IAC, which advises the SEC on various regulatory issues, met with the experts Thursday to discuss methods to develop better disclosures for investors.
Disclosures were among the topics that took center stage when the SEC was still gathering comments and working on Regulation Best Interest, which was finalized in June.
Reg BI includes a requirement for both brokers and advisors to give retail investors a Customer Relationship Summary that provides simple, easy to understand information about the nature of their relationship with their financial professional.
Thursday’s discussion covered all disclosures that are required for retail investors.
Many of the SEC’s disclosure requirements were created in a “paper world” but “the world has moved on,” making discussions about improving disclosure requirements, content and delivery critical, according to Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the IAC.
Brenda Cude, a professor at the department of financial planning, housing and consumer economics at the University of Georgia, outlined six “major points” to factor into creating disclosures:
- Disclosures are more likely to be effective if it’s created with a consumer empowerment goal in mind. Many of the disclosures we see today were not written with empowering consumers as a goal.
- Many corporate disclosures are written by the legal department with the goal of protecting the company.
- Disclosures designed to protect consumers require expertise. Companies never question the need to spend for legal expertise, so they should also be willing to pay for disclosure expertise.
- It’s fairly easy to say a disclosure will be evaluated on its reading level, but a poorly formatted disclosure with lots of legalese makes it more complicated if not incomprehensible.
- The timing of the delivery of the disclosure is critical. When it’s time to make a decision, often, that’s too late. With mobile phones, apps and other technology, timing should be less of an issue.
- Providing the intended recipients of disclosures with more knowledge is important. There will always be people who know less than they should because there’s so much to know and the market changes regularly.
Yuhgo Yamaguchi, vice president for design strategy at Fidelity Investments’ innovation center, Fidelity Labs, says the firm exercises empathy when creating disclosures.
“Consumers are constantly expecting more from us. Customer satisfaction is extremely important,” he says. “Empathy is something we use all of the time to better understand our customers. More empathy can always help us better understand who we are working with.”
Dan Silverman, a professor of economics at Arizona State University and a research associate at the non-profit National Bureau of Economic Research, says the challenge is balancing the costs of producing and delivering disclosures and how effective they are for the investors.
While technology is making it cheaper to deliver disclosures, it also pushes companies to provide more disclosure that can become overwhelming and meaningless to investors if they don’t read them, he says.
Silverman says consumers tend to not want to make a choice when faced with too much disclosures; or they may decide to go with a product that has the least disclosures to review even if it may not be the best for them.
Billy Kingsland, group director for brand communication at brand strategy, design and experience firm Siegel+Gale, says the key to an effective disclosure is simplicity.
He outlined three characteristics that fall within that simplicity requirement:
- Clear: The disclosure must be transparent, comprehensible and in plain language.
- Beautiful: The disclosure must be compelling, fresh and memorable, so it makes an impression.
- Useful: The disclosure must be fit for purpose and delivered in the right form.
“Disclosure forms are a more intimate personal experience” compared to television marketing, for example, says Kingsland. “They are unheralded touch points — they can make or break experiences for an organization.”
Kingsland says companies must also realize that consumers “have more sophisticated and evolving benchmarks … and they are not comparing Fidelity to Vanguard; they are comparing Fidelity to Amazon or Netflix.”
“Consumers are bringing various experiences across industries to any interaction they are having with any brand,” he explains.