Research focuses on ways to mitigate three key barriers to investors’ using annual fee reports as intended
The Ontario Securities Commission (OSC) has released a report that examines how investment fees can be better communicated to investors in annual reports.
Drawing from research conducted in partnership with the UK-based Behavioural Insights Team (BIT), OSC Staff Notice 11-787 Improving Fee Disclosure Through Behavioural Insights highlights issues that get in the way of clients’ reading and understanding annual fee reports required by CRM2.
The report identified 24 tactics that registrants and other stakeholders can adopt to mitigate:
- Barriers to engagement, which could prevent investors from realizing that the reports contain crucial information they need to know;
- Barriers to comprehension, which could leave investors confused, uninformed, and misguided; and
- Barriers to action, which could prevent investors from knowing or taking next necessary steps
Investors, the research found, can end up not engaging at all with their annual fee reports for several reasons. They may be included with or added to the end of another less important document; mailed reports may appear to be “just another document” to recipients; and e-mailed reports may end up buried among other e-documents and email notifications.
To address engagement issues, the OSC report suggested that firms send their annual reports as a standalone document; use language and visual cues that call investors’ attention to the importance envelopes for mailed annual reports; send investors an alert or notification that grabs their attention; and monitor whether recipients have opened the fee report, sending reminders to those who have not.
The research also highlighted several barriers to investors’ comprehension of annual reports. Aside from the use of non-intuitive language, recipients may be overwhelmed by the volume of information and may not understand which of their fees are included in the report, and which are not. The BIT also noted challenges with indirect fees, saying that investors may not understand how they work or possibly underestimate their true cost.
Aside from using simpler terms or plain-language resources to explain key concepts and different fee types, the BIT suggested the development of standardized terms for different fee types and a common plain-language guide or handbook to use across investment firms. Other suggestions included eliminating non-essential or redundant information, using a series of benchmarks to put investors’ fees in context, and creating an interactive tool to show a projection of fees’ impact on returns over time.
The BIT also highlighted several possible barriers preventing properly informed investors from taking action, such as discomfort, friction costs, ignorance regarding options for next steps, and a misconception that disclosure removes the need to take further action. The solutions suggested included providing investors with a simple list of potential actions, explicitly linking fees to the actions or services that triggered them, and creating a “script” of suggested questions for clients.
The OSC report is in line with research on financial disclosure released by the Investment Funds Institute of Canada (IFIC) earlier this year. Last week, IFIC announced the launch of the second phase of its research, which will focus on assessing the relative efficacy of online interactive disclosure compared with current CRM2 statements.
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