The investment industry has put a renewed focus on the importance of improving investor awareness and understanding of the fees they pay for their investments. This has arisen in large part out of the recognition that today’s investors expect more from our industry, including greater transparency. In fact, studies indicate that rising client expectations have replaced regulatory demands as the top concern for investment firms.
Earlier this year, the Investment Funds Institute of Canada (IFIC) partnered with a behavioural economics (BE) consulting firm to release a study that looked at how behaviourally informed tactics could improve investor comprehension of investment fees and performance.
More recently, the Ontario Securities Commission (OSC) released a report on fee disclosure. The OSC also retained a BE firm to test different fee disclosures with 1,900 investors and make recommendations. Full disclosure: I worked with the BE firm on the report, which identified a number of barriers that keep investors from fully understanding fee disclosure, as well as ways to make fee reports more engaging and easier for investors to understand and act on.
The BE approach used by both studies has proven to be an effective way of understanding how to improve investor engagement and comprehension, and enable investors to make better financial decisions.
The OSC report specifically identified three barriers that exist with current CRM2 fee reports:
1) Barriers to engagement. Investors may not see or read the fee report. The OSC report noted that only one out of nine people interviewed said they had received an annual report detailing investment firm fees, despite the fact that CRM2 reports have been delivered since 2017.
2) Barriers to comprehension. Investors are confused by the terminology used in fee reports, or the volume and content of the reports overwhelm the reader.
3) Barriers to action. Investors don’t know how to act on the information they receive.
Most of the OSC report’s recommendations to overcome these barriers are designed to be implemented by dealer firms. But there are a number of things advisors can do to help meet client expectations around fee transparency and begin to address the barriers that clients face.
Tackling the Barriers
Engagement
Talk to your clients about their fees.
Although some advisors may breathe a sigh of relief when their clients don’t notice or understand their fees, it is better to proactively address the topic of fees with all your clients. Contrary to what you may expect, client trust increases for advisors who are transparent about their fees.
Comprehension
Use simple terminology.
When talking to your clients about fees, keep in mind that they aren’t familiar with much of our language. The OSC report found that terms such as “third party compensation” and “trailing commission” are especially difficult for investors.
Consider substituting the term “indirect charges” for third party compensation. Talk about fees as being “direct” and “indirect” – fees clients pay directly, and the indirect fees you and your firm receive for the services you provide. It is also important to help clients understand that both direct and indirect fees impact the performance of their investments.
Start with the important information and keep your explanations focused.
The intention is not to limit the information you provide to your client, but instead to help them focus on what matters. Too much detail can overwhelm clients, which can mean they don’t end up understanding or retaining any of the information you provide. For the few clients who want more information, be prepared to answer their questions.
Help clients understand the value they receive for the fees they pay.
Increasingly, clients are seeking to understand what they’re paying for. Be sure to articulate the value-added services that you’ve provided, such as goal-setting or retirement planning.
Action
Use the annual client meeting to help clients make better-informed choices.
Your annual client meeting, where you review your client’s circumstances and goals, is an opportune time to help them understand their options. This is your opportunity to support them in taking action to produce better outcomes for their financial future.
Increasingly, both regulators and the industry are recognizing the importance and value of having educated investors. One of the true benefits for advisors is that an educated client tends to be a more engaged client — and one who can truly appreciate the value they receive from advice.