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Advisor Mutual Funds Simpler financial statements can help investors make better decisions: research

‘When you’re designing this document, it’s about how to bring the most important things to the forefront and push the other stuff to the back. The reality is you can’t have it all on the front page,’ says Dave Carr-Pries, vice pres­i­dent, product and marketing, at In­vestorCOM Inc.

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Client account statements have become more complex over the years, and the enhanced performance and cost disclosure mandated as part of the second phase of the client relationship model (CRM2) has made these documents harder to navigate for many investors. Yet, recent research reveals that small changes in the way fee and performance data are reported on clients’ account statements can make a big difference.

In an effort to explore the effectiveness of CRM2 disclosure, the Investment Funds Institute of Canada (IFIC) retained behavioural economics consulting firm BEworks Inc. to conduct research into the matter. In early March, the parties released Behavioural Economics Applied to Enhance Disclosure Practices and Investor Outcomes, which points to tangible changes that financial services firms can make in how they format and deliver their statements to investors.

For the study, a group of 2,597 English-speaking Canadian investors were given one of two sample statements to determine their overall comprehension of the information within the statements and whether changes to facilitate their understanding would result in positive financial decision-making.

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The first document was designed to mimic the current standard CRM2-mandated client account statements while the second used unique “behaviourally informed” approaches, including visuals, simplified language, chunking of information by theme and goals-based tracking. (Both a simplified and comprehensive version of the second statement were used in the study.)

Investors who were given a “behaviourally informed” CRM2 statement had a greater understanding of the complex details. There also was an increase in likelihood that investors reading the statements would behave in ways that were more in line with their financial goals.

“Relatively minor changes can have a significant impact on investor ... comprehension,” says Paul Bourque, IFIC’s president and chief executive officer. “Things like reducing the amount of text you use, making key information [and] summaries salient, breaking out the key information, chunking it, and what they call ‘traffic-light labelling’ on the goal framing [which includes green for good behaviour and red for bad behaviour], these were things that we think we can use.”

For financial services firms considering redesigning their client account statements, it’s key that they consider placing the most important information at the start, with the assumption that the average investor is not likely to read the entire document, says Dave Carr-Pries, vice-pres­i­dent, product and marketing, at In­vestorCOM Inc., a Brantford, Ont.-based fintech firm that focuses on effective and compliant client-facing communication.

“When we talk to investors, they rarely look past the first page [of their statements], and they’re really just looking for a few key pieces of information,” he says. “‘When you’re designing this document, it’s about how to bring the most important things to the forefront and push the other stuff to the back. The reality is you can’t have it all on the front page’.”

Mr. Carr-Pries also stresses the importance of “resisting the temptation to fill the statement with more information.” Be selective about what’s considered to be of highest importance rather than overloading the first page of a statement with non-essential information that could overwhelm investors and reduce their overall comprehension, he advises.

White space on statements is “not there to be filled,” Mr. Carr-Pries says. Similarly, he warns against writing overly long sentences, which can quickly lose a reader’s attention.

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“The longer the line, the odds of reading it and being able to track it go down,” Mr. Carr-Pries explains. “That doesn’t have anything to do with visual impairment, it has to do with attention span. … Think of disclosure by tweet.”

Another approach to make account statements more appealing for clients is to offer digital, personalized versions, says Donna Bristow, managing director, North American Wealth, at Broadridge Financial Solutions Inc. in Toronto.

“It’s all about investor choice,” she says, “and giving the investor the ability to pick the delivery channel, the distribution channel that they want to receive [a statement] in, and having that statement be really easy to read. Give them the key highlights that they want to see in order to engage a more productive conversation between advisors and investors.”

Lake Success, N.Y.-based Broadridge offers tools to allow firms and advisors to change how statements are organized and sent to investors based on their specified preferences.

“While [an advisor] may be serving a thousand different investors for their particular book, tools allow each statement to look unique based on certain criteria based on that particular investor and how they want to receive that information,” Ms. Bristow explains.

Regardless of the approach taken to make account statements easier to understand for clients, reducing the learning curve investors experience while adjusting to a new format is key.

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In fact, in one test of memory recall BEworks performed for the IFIC study, investors were shown a current CRM2-mandated statement next to an enhanced “behaviourally informed” CRM2 statement for a short period of time. Then, after having both statements removed from their line of sight, they were asked to recall key findings from each.

Surprisingly, investors had greater odds of remembering findings from the current statements over the enhanced one, likely because the former looked similar to statements they were used to reading already. The finding underscores the difficulty inherent in learning how to understand a new document or format.

Ellen Bessner, partner at Babin Bessner Spry LLP in Toronto and author of two books for advisors, is among many investors who has experienced the challenges of having to adapt to a new account statement.

“When format or content changes, even I find it difficult to adjust to my statements,” Ms. Bessner says. “Over the long term, I might find it’s an improvement, but it’s like anything. Even if you get something nicer, like a nicer car, you still have some growing pains to figure out how to work the thing.”

Ms. Bessner says she seeks out guidance from her advisor to make the transition process smoother. However, she believes not every investor may feel comfortable asking for help with reading their statements – so she encourages advisors to take the first step.

“The more communication you have with clients, the better,” advises Ms. Bessner, whose most recent book is entitled Communication Risk: How to Bridge the Client-Advisor Gap to Protect and Grow Your Business. “If you can, give them a tutorial on a regular basis, even if the statements haven’t changed. You could say, ‘I just want to make sure you’re understanding your statements.’ What’s good about that approach is that clients feel more comfortable to ask questions because the advisor has initiated it.”

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Ms. Bristow, who’s witnessed firms navigating this transition with varying degrees of success, suggests easing clients into the changes before they’re even made, using technology to publicize coming changes and deliver previews of the new format for the statements.

“[Create] awareness and communication,” she says. “Whether it’s through online channels or inserts within [clients’] existing statements, you have to get that engagement with investors and get them comfortable with what’s coming.”

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