It's About Time Financial Advisers Spoke in Plain English
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What issue opens this episode about financial advisers and confusing jargon?
Here's your Money Briefing. I'm Anne-Marie Fertoli at The Wall Street Journal in New York. Oftentimes, financial advisors leave customers confused in a blizzard of jargon and gobbledygook. Our J.R. Whalen sat down with Wall Street Journal Intelligent Investor columnist Jason Zweig, who explains how the Securities and Exchange Commission is directing advisors to clear up confusing language. We'll have more on that coming up, but first, some money and market headlines. More companies are trying to recruit more diverse candidates for their C-suites after facing pressure from both investors and lawmakers to boost gender diversity in the executive ranks. Companies are also tying performance reviews and pay to diversity hiring targets.
That's having a boost to the bottom line. A recent study by S&P Global Markets Intelligence found that companies with female chief financial officers are more profitable than those without.
Why is the SEC introducing a new rule to simplify advisor and broker disclosures?
The study examined the largest 3,000 U.S. companies from 2002 to mid-2019. Those companies saw a 6.2 percent increase in profitability during the first 24 months after the appointment of a female CFO, compared with those with male finance chiefs. Still, the number of female executives at large U.S. companies is quite low. Last year, less than 13 percent of CFOs of Fortune 500 companies were women, and only 9 percent of companies in the Fortune 500 appointed female CEOs. Coming up, how the SEC is directing financial advisors to communicate more clearly.
Yield curve, relationship summary, debt service coverage ratio, fixed assets. Terms like these are likely to turn up in brokers' financial disclosures. The SEC has a new rule requiring advisors and brokers to simplify the language in their disclosure statements. But Wall Street Journal intelligent investor columnist Jason Zweig is here. He says if investors still can't understand the language, it's not simple enough. So Jason, what was the overall problem here? Why did the SEC feel it had to step in and get involved?
How did the SEC and Rand Corporation test whether investors understand disclosures?
I think the main motivation for this new rule was the move toward best interest or fiduciary duty, the requirement that brokers, like investment advisors, have to put their clients' best interest first. And there was a lot of concern. That there would be confusion in the marketplace between investment advisors and brokers and that consumers wouldn't necessarily understand the services they were being delivered.
So best and good being sort of cloudy, fuzzy terms. They felt that there might be too much room there, too much wiggle room for organizations?
Exactly. And there's also a lot of potential for confusion because many brokers act sometimes as advisors and sometimes not. So sometimes they have your best interest and sometimes they don't. So by unifying all those people under one standard, the thinking was now we need a new kind of disclosure.
So, Jason, the SEC passed this rule and it needed, what, 165,000 words to essentially explain how advisors and brokers should simplify their language?
Yeah, that's correct.
What did testing reveal about how long investors actually read fee and conflict information?
Well, I mean, to be fair, making something easy is hard. And I think the length of this disclosure rule or the length of this rule about disclosure shows just how hard it is to make it simple. I think the real problem with this regulation is that while it does give investors more of what they need to know in terms that are somewhat easier to understand, I think it overestimates the knowledge base of a lot of American investors. And the thing that most people need is to be told why something is important, not just to be told what it is.
And the SEC hired the Rand Corporation to do some testing and surveying and preparing this rule. The results were not what they expected. Well, I don't know what they expected. Well, maybe not what they had hoped.
Yeah. What they found, people typically spend an incredibly short amount of time processing this kind of information. As I recall, I think the amount of time people spent reading about fees and expenses was 47 seconds. And the amount of time they spent on conflicts of interest was 22 seconds.
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Chapters
7 chapters
1
What issue opens this episode about financial advisers and confusing jargon?
0:05–0:55
2
Why is the SEC introducing a new rule to simplify advisor and broker disclosures?
0:55–2:10
3
How did the SEC and Rand Corporation test whether investors understand disclosures?
2:10–3:22
4
What did testing reveal about how long investors actually read fee and conflict information?
3:22–4:50
5
Why do conflicts of interest and fees need to explain 'why' as well as 'what' to investors?
4:50–6:53
6
Could firms be using complexity intentionally and how is Congress responding?
6:53–8:44
7
Will the new SEC disclosure rule make adviser communications simpler for investors?
8:44–10:48
Speakers
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