There is widespread agreement among investors, regulators, investor advocates and the investment industry that the implementation of annual cost and performance reporting is an important step forward in investor disclosure.
As with any important regulatory reform, it is important to assess the impact of the second phase of the client relationship model (a.k.a. CRM2) on investor awareness and understanding of fees and performance, and look for ways to improve investor outcomes.
Surveys by the Investment Funds Institute of Canada and others have shown that CRM2 reporting has improved some aspects of investors’ awareness and understanding of fees and the performance of their investments.
In the 2018 Canadian Mutual Fund Investor Survey, seven in 10 investors said they were confident that they understand their mutual fund fees, and 84% of mutual fund investors who had read their statements reported that their CRM2 statements clearly showed the rate of return on their account.
The survey also identified some notable challenges. There was a 10% decrease from 2017 in the number of investors who said the reports are easy to understand, and an 8% decrease in the number who said the statements provided all the necessary information.
We set out to address those challenges by launching a research project to examine current CRM2 statements with the objective of finding out whether behavioural insights can improve the way fee and performance information is shared with investors.
The multifaceted project, conducted by BEworks Inc., involved interviews with Canadian and international stakeholders and a review of academic and industry research to identify key barriers to effective disclosure and tactics for improved disclosure. It also involved a behavioural audit of a sample of current CRM2 statements, and the development of enhanced statements based on best practices and behavioural insights.
A major component of the research was a randomized controlled trial experiment to compare enhanced, behaviourally informed statements to a model “control” CRM2 statement that represents current practices.
The experiment showed that the enhanced CRM2 statements were more effective at conveying complex information than the control statement. The enhanced statements also led to higher subjective understanding and were read more thoroughly than the control statement. An enhanced statement with goal framing also proved effective in having investors state a willingness to increase future savings. In an unexpected finding, the control statement was more effective at conveying basic information.
This research demonstrates how behavioural economics principles can be used to improve aspects of fee and performance reporting. We have learned that barriers to comprehension of financial information do exist and that they can impede action by investors. We’ve also learned that even relatively minor changes to language and graphics can have a significant and positive impact on investors’ detailed comprehension, confidence in understanding, and attention.
Equipped with this knowledge, along with other recommendations, we are turning our attention to next steps.
We will be looking to build on this research, evaluate opportunities for further study and operationalize the recommendations, including translating the recommendations into practical tools for the industry.
That work includes developing new, enhanced model reports that advisors and firms can use to facilitate effective client conversations about portfolio performance and fees. Our goal is to support advisors in building trust and to enhance investors’ ability to make informed decisions that are aligned with their financial goals.