Clearing Up Investor Confusion Over Fees and Regulations

Investor confusion regarding the fees they pay and regulatory distinctions persists, as evidenced by studies and reports dating back to 2008. The complexity of differentiating between investment advisers (IAs) and broker-dealers (BDs) has led to misunderstandings among investors, highlighting the need for more transparent communication and education in the financial industry.

• Investor Education
• Financial Regulations
• Fee Transparency
• Investment Advisers
• Broker-Dealers

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1. Improve Investors Fee IQ, End Investor Confusion Investor confusion over the fees they pay is no surprise; the solution is no mystery September 20, 2021 Knut A. Rostad, President, Institute for the Fiduciary Standard www.thefiduciaryinstitute.org

2. End Investor Confusion? Since 1934 the SEC has disclosed financial information for Main Street investors Since 2008 (or earlier) investor confusion I.E: investor fault has driven discussions of regulations of retail investors Research and SEC research suggests this paradigm is wrong and should be replaced by information confusion / omission 2

3. RAND Report 2008* The 2008 RAND Report, The Bible of retail investor perceptions of BDs and IAs , defines the current confusion paradigm Not surprised (many investors) did not understand key distinctions The roles are confusing RAND Report RAND tested an ad for an IA and an ad for a BD: Firm A Firm A stressed the importance of building a relationship based on trust (and) described the expertise of its (advisors) Firm B Firm B stressed careful planning and (specifically mentioned) the firm s expertise and experience (and) philanthropy, asset management and wealth transfer strategies Investor and Industry Perceptions on Investment Advisers and Broker Investor and Industry Perceptions on Investment Advisers and Broker- -Dealers, 2008 Dealers, 2008 3

4. RAND Report 2008 RAND also tested fact sheets for IAs and BDs Even after being presented with fact sheets, participants were confused by the different titles common job titles are so similar that people can easily get confused over the type of professional with which they are working Some did not understand whether fiduciary was a higher standard than suitability 4

5. RAND Report 2018* A RAND Report in 2018 tested 31 investors on the CRS form on IAs and BDs Some participants . demonstrated significant misunderstandings Some did not appear to have synthesized the information and be able to apply it. the differences between account types never fully grasping Investor Testing of Form CRS Relationship Summary, 2018 Investor Testing of Form CRS Relationship Summary, 2018 5

6. RAND Report 2018 CRS fails on fees due to vague ideas and unclear language Some investors said the IAs/BDs were described the same On fees On fees Or ... said the fee section is overwhelming and lacked, More specific details on fees On fees On fees If you are price comparing you are going to be looking at the specific price you are paying 6

7. Kleimann Report, December 2018 Kleimann researchers tested new CRS language and found how certain words increase investor understanding Commission is better than transaction-based Sales is better than brokerage Fiduciary Highest legal standing and in relationships of trust have meaning; best interest , conflict consent and mitigation do not have meaning Kleimann Kleimann Communication Group, December 5, 2018, Report on Testing Model CR Communication Group, December 5, 2018, Report on Testing Model CR 7

8. Institute for the Fiduciary Standard New Paper on Form CRS* Review: CRS forms of 29 large dual registered firms Roles and purposes of IAs and BDs are obscured or omitted Point one Point one Investors are not clearly informed BDs primary role to distribute securities for 3rdparties directly conflicts with IAs role to advise clients as fiduciaries Point two Point two Investors are not clearly and uniformly informed what they pay for advice, investments and other services SEC CRS Disclosure Need Fixing: Here s Why / How, September 22, 2021, SEC CRS Disclosure Need Fixing: Here s Why / How, September 22, 2021, www.thefiduciaryinstitute.org www.thefiduciaryinstitute.org 8

9. SEC on Requiring Fee Disclosure: Costly, prone to errors SEC rejects requiring BDs disclose actual fees, cites significant operational burdens . The SEC explains*: Individualized fee disclosure may be helpful to some retail customers, but can be costly, prone to errors and cause delays in trade execution We believe that standardized disclosure furthers our goal of informing investors. SEC Reg BI Final Rule, June 5, 2019, page 170 SEC Reg BI Final Rule, June 5, 2019, page 170. 9

10. Improve Investors Fee IQ, End Investor Confusion Improving investor Fee IQ means adopting a new paradigm Today s paradigm Today s paradigm: investor confusion explains why effective regulation and disclosure is so hard to achieve The new paradigm The new paradigm: information confusion, omission explains how effective disclosure can immediately improve regulation The bottom line: The bottom line: The SEC can fix disclosure quickly and end much confusion 10