Wednesday, June 20, 2018

Making Disclosures Useful

A few days ago, the SEC's Investor Advisory Committee convened at Georgia State University's law school.  They took testimony from the AARP about how to structure disclosures about financial professionals for use with retail customers.  Retirement security will be a bigger and bigger issue as more and more Baby Boomers enter retirement.

The AARP pointed out that effective disclosure needs to be short, simple, and clear:

We believe that the current four page relationship is too long, technical, and therefore too onerous for the average investor and household to process. The text of the relationship summary should be simply written and should avoid technical terms like “fiduciary” and “asset‐based fee” unless such complex terms are clearly defined. Behavioral science has shown that when faced with a complicated choice, people often simplify by focusing on only two or three aspects of the decision. The less they are able to frame the decision in narrow terms, the more likely they will end up overwhelmed, undecided or procrastinating. As with other disclosure statements, it is best if key information can be included on one page – additional secondary information can be attached as supplemental information. A good disclosure statement will highlight the information most important to the consumer.

As the SEC thinks about how to make disclosure actually useful, it should probably test to see how different disclosures actually perform.  My framework for thinking about this is heavily informed by Lauren Willis's work.  She laid out the need for consumer disclosures to be informed by research about how consumers actually behave instead of some fantasy of a calm, well-educated person with the time to read and carefully consider pages of boilerplate.  The SEC has a chance to get these disclosures right.  Hopefully it crafts disclosures that actually help consumers.

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