On June 30th, 2020, the SEC’s Regulation Best Interest (Reg BI) comes into effect. If you’re a broker-dealer or adviser, you need to be ready now. It involves creating Form CRS – client relationship summaries – written in plain language and in a maximum of four pages. We’ve been exploring the plain language aspects of this new rule in our recent blog posts.
Why we need this ruling right now
Simply put, research shows that investors don’t understand financial disclosures. The SEC carried out a survey in which they asked investors about six common types of fees. For each fee type, roughly 25% of investors couldn’t determine whether they paid it or not. And more than 20% thought that they didn’t pay any fees at all. Brokers urgently needed to improve the clarity of these disclosures.
Enter Reg BI. Its overall aim is to enhance the transparency and quality of investors’ relationships with brokers.
Why don’t investors understand disclosures?
Just because someone has money to invest, doesn’t make them an investment expert. That’s what we look for from advisers. And even if the investor knows a little about the financial services industry, there are a number of reasons why he might not understand a disclosure.
People are “blazy”
A recent Wall Street Journal article posed the theory that investors
make irrational decisions because people are “blazy”. Busy and lazy.
“In a world where information is almost infinite, but time and attention are limited, none of us want to think any harder than we have to. So it’s rational to use shortcuts to make decisions. If you have a few hours to spare this weekend, you can attend your child’s soccer game, read The Wall Street Journal or study a disclosure for a brokerage account you’re about to open.”
The article suggests that you might do some of these activities, but not all. You might go to the game, read some of the journals, and give the disclosure a cursory scan. If the document is lengthy, and difficult to read, you probably won’t take it in. And you might not even bother to try.
And there’s cognitive load theory
But let’s not place the blame fully on “blazy” investors. I’d fight for our right to be busy and lazy. Brokers need to adapt to our “blaziness”. They also need to recognize that science comes into play here.
Cognitive load theory states that our brains have limited working memory to process information. The busier your target audience, the less time they have to decode the messages within your communications. So using complex language makes content harder to digest, and adds to customers’ cognitive load. The US Government’s Plain Language website puts it best:
“Simple words help you express your message clearly. Too many complex words are like hurdles in a race, barriers to understanding which slows readers down. Replacing complex words with simpler words whenever possible lets your readers concentrate on your ideas and information.”
Advisers need to reduce the barriers to understanding disclosures, by making them more readable.
What does the ruling mean in terms of plain language?
Form CRS will need to cover:
- Conflicts of Interest
And organizations will need to write it in plain English, in two pages (or four for firms offering brokerage and advisory services). This means that before 30 June 2020, brokers will need to:
1.Get to grips with plain language principles
Advisers are experts in investments, not in plain language. They will need to take time to familiarize themselves with the following plain language principles:
- Use active, not passive voice
- Keep sentences short – less than 25 words
- Aim content at grade level 8 or below
- Use simple words – avoid jargon and complexity
It sounds simple enough. But writing in plain language and editing your own content is no mean feat. It can take time for a writer to perfect this precious skill, let alone a broker.
And once she’s absorbed plain language principles, in an ideal world our broker would implement these across her entire organization. And for all customer touchpoints. Because what’s the point in only making Form CRS readable? It’s a good place to start but it won’t transform your Customer Experience.
This new consideration for plain language will therefore likely result in:
- Organization-wide internal training
- Identifying and rephrasing often-used complex words or jargon
- Testing the clarity of disclosures with those not familiar with the industry (the “dinner table test”)
- Automating where possible to lighten the load
“They’re requiring a lot … that I’m not even sure plain language can deliver in two pages… When the subject is complex, you may need more words to simplify it. It’s not merely eliminating complex words, but it’s explaining the concepts and meaning.”
Remember, this all needs to happen before June 30th, 2020.
2. Create long-term processes
The new ruling isn’t a case of “once and done”. You must observe the June deadline. But every single Form CRS after that will also need to comply with the plain language criteria. Once you’ve plowed through the background work, think about how you will manage this going forward. If you haven’t yet got processes to manage delivering clear communication, you’ll need to make some operational changes. Our clarity experts are able to advise on this, as well as benchmarking and tracking.
This might sound like a lot to do, but organizations that get this right can make huge gains. Forget compliance for a moment. Clearer communications lead to improved Customer Experience, more profit, and reduced operational costs.
For example, a government agency worked on the clarity of their customer notices. A 10-page notification full of complex words and jargon became engaging communications written in plain English. Taxpayer confusion dropped by 50%, and they saw a 23% drop in call center traffic. Not only that, but taxpayers became even more willing to part with their money. There was a 3% increase in people paying within a month. Clear communications come with many benefits.
Resources to help you get started
The SEC published a handbook in 1998 to help advisers create disclosure documents written in plain English. Over twenty years later, it’s still a useful resource. The Plain Language website also has some practical advice, including a checklist to use alongside the SEC’s handbook.
And you’re welcome to speak to our team. They can advise on what plain language looks like, as well as managing this across your whole organization.
There’s never been a better time to embrace plain language
This is a welcome move from the SEC, and very timely. The 2020 Edelman Trust Barometer indicates that trust is declining across many industries. Although we’ve seen trust uptake since the start of the COVID-19 pandemic. Financial services remain at the bottom of the table. Something must change, and improving the clarity of disclosures seems a good place to start. It puts the power in the hands of the investor. They can easily compare advisers like-for-like and better assess factors such as fees and conflict of interest.
And for brokers, it’s both an opportunity and a risk. Those companies who do it well will see increased loyalty and profit as a result. Those who fail to comply will no doubt lose business. What will you choose?