Fi360: Advisers should be more open with disclosures to clients

The following was posted to InvestmentNews’ “From the Fiduciary Blog,” which is maintained by the Fi360 team.

As part of the SEC’s Dodd-Frank Act-mandated requirement to conduct a study regarding financial literacy among investors, the agency recently requested public comment on how to improve disclosures, what information is most useful for investors to make informed decisions regarding the selection of financial intermediaries, products, and services, and how to increase the transparency of expenses and conflicts of interest.

Fi360 is among 43 individuals and entities who submitted comment.
Among the recommendations we make are:

• The Jump$tart Coalition’s standards for saving and investing are an appropriate framework for defining “financial literacy” for the investing public.
• The SEC should require disclosures to be in language that is both fundamental and direct, so that a high school senior can understand them.
• An RIA’s fiduciary obligations already require disclosure of conflicts of interest at the time specific services are provided, not just at the outset of the relationship with delivery of Part 2.
• The SEC should stress the fiduciary duty of due care of advisors and other intermediaries when the effects of major life changes, age, and other timing issues may impair an investor’s ability to make informed decisions.
• The SEC should consider a “side effects” disclosure for investment products, similar to the FDA’s requirements for pharmaceutical companies.
• The SEC should consider an abbreviated risk warning system for ‘volatile’ investment products, similar to the Hazardous Materials Information System used by DOL’s Occupation, Safety and Health Administration to denote fire risk.
• The SEC should consider adopting similar fee and services disclosure requirements recently enacted by the DOL, i.e., 408(b)(2) for investment advisory services.
• The SEC should add clear language on the differences between the fiduciary and suitability standards of care to their investor.gov website.
• In lieu of creating a rules-heavy framework for a uniform fiduciary standard for brokers and advisors, the SEC should instead stress the broad fiduciary duties in regulatory guidance and sweeps, deficiency letters, and fiduciary breaches in enforcement actions.

We believe that the current state of financial literacy is analogous to actual literacy rates in the early 19th century for Americans. Investors lack the most basic skills for making investment decisions and therefore are dependent on the intermediaries they entrust to their financial well-being. For these reasons, we feel that disclosures must be harmonized and made stronger and more straightforward. A quick review of some of the other feedback received by the SEC, however, reveals that not everyone feels the same. A number of comments called for less disclosure or for disclosure systems that are even more complicated than what exists now, recommendations that don’t really seem to address the fundamental goal of creating a more financially literate public.

At the end of this study, the SEC is to report back to Congress on its findings along with “a strategy to increase the financial literacy of investors in order to bring about a positive change in investor behavior.” It is our hope that the SEC recommends adopting a number of the measures we have presented for the benefit of investors. Industry instincts for self-preservation and the status quo are strong, though and as we have seen in other areas of regulation, reform can be a slow and uncertain process. But given the current status of financial literacy and disclosure and the low bar currently being set by the industry at large, it would seem that an opportunity exists for advisors who have nothing to hide in terms of their fiduciary processes and commitment to their clients to distinguish themselves by adopting a more progressive approach to their education and disclosure activities.