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Financial Industry

Betterment Encourages SEC to Adopt Investor-Friendly Disclosure

As the SEC considers new rules to better protect and inform investors, Betterment formally suggests ways to improve a new disclosure, Form CRS, based on actual investor research.

Articles by Seth Rosenbloom

By Seth Rosenbloom
Associate General Counsel, Betterment  |  Published: August 13, 2018

Recently, the Securities and Exchange Commission (the SEC) proposed a package of rules designed to improve the quality of investment advice. This is a subject that we care passionately about, so we carefully studied the SEC’s proposals and filed a public comment explaining how the rules could be strengthened. We focused in particular on the SEC’s proposal for a new disclosure document intended to provide investors with simple, easy-to-understand information about investment firms.

Here at Betterment, we aim to make investing advice clear and straightforward. We think investors make better decisions when they have a clear idea of what they’re getting from a financial services provider—and what they’re not. The SEC’s proposal inspired us to think critically about how the entire investment industry could better inform investors. We decided that we could have the greatest impact by designing our own disclosure document and testing it with actual investors. It is our hope that the SEC will find suggestions supported by this type of data to be particularly worth considering. Our comment letter sets out our specific proposals, and the supporting research, in detail. We’ll provide the highlights and some additional perspective below.

Our letter to the SEC is part of Betterment’s continued efforts to support smart regulation that helps individual investors make better decisions for their money. We were a vocal advocate for fiduciary standards for advice on retirement accounts as proposed not long ago by the Department of Labor—and in this comment to the SEC, we make similar points. Individuals deserve to know which investment firms are aligned with their interests, especially given the high stakes of investing well.

Our comment focuses on a document called Form CRS.

We began our comment, addressed to the Secretary of the SEC, by explaining who Betterment serves: our clients, all of whom rely on the SEC to help safeguard the quality of investment advice.

Dear Mr. Fields:

We are writing on behalf of Betterment LLC, an SEC-registered investment adviser that manages over $14 billion for nearly 400,000 clients, the vast majority of whom are individuals. We applaud the Commission’s efforts to improve the quality of advice provided to retail investors and investors’ understanding of the options available to them.

The stakes are high. Millions of Americans need to invest, and invest well, in order to fund essential financial goals, including retirement. If the Commission is successful in this rulemaking, more retail investors will receive the right professional guidance for them

…which should lead to better outcomes for their lives. This rulemaking has the potential to enhance individual financial security and alleviate the country’s broader shortfall in retirement savings.

In this comment letter, we: (1) explain why we believe that this rulemaking is critically important, and (2) offer our views on specific ways that the proposed rules could be strengthened. In particular, we describe our efforts to improve the Commission’s new disclosure document, Form CRS, which is intended to provide retail investors with simple, easy-to-understand information about investment firms.  

To provide the SEC with more than just our opinion on Form CRS, our comment provides evidence about how our proposed version of Form CRS performed with real investors. That testing showed that our proposed changes to the form, designed to make it clearer, more focused, and more visually appealing, could help improve its overall effectiveness. We also explained our position that Form CRS should explain all the ways that firms are making money from their clients so that investors have a better understanding of how financial conflicts can impact the quality of advice they receive. At Betterment, we strive at every turn to build a business that aligns our interests with our clients so that they can trust that our recommendations of particular investments are not compromised by our financial interests.

We explained the stakes: Investors deserve quality investment advice.

Before diving into the data and our specific suggestions, we wanted to remind the SEC exactly what’s at stake for the finances of individual Americans.

As [SEC] Chairman Clayton recently observed, it is

“more important than ever that people save and invest for their own futures.”

Many Americans face a significant shortfall in their retirement savings, exacerbated by soaring health care costs and longer life expectancies…

In this environment, access to personalized investment advice is crucial. Indeed, not only can advice help Americans decide how to invest, it can play a critical role in getting them comfortable investing in the first place. As a recent Treasury report observed, “[e]stablishing a pattern of saving and investing during the early period of an individual’s career can significantly increase the probability of long-term success in accumulating wealth and building retirement savings.” At Betterment, we spend considerable time ensuring that we are explaining financial concepts simply, designing (and testing) appealing user experiences, and effectively serving both seasoned and first-time investors.

As if it weren’t challenging enough for Americans to meet key financial goals like retirement, conflicted advice can make things worse.

…[C]onflicted advice imposes a significant drag on the economic security of millions of American households. While it is difficult to fully pinpoint the financial impact of conflicted advice on retail investors, both in the form of higher fees and lost returns, estimates are in the tens of billions of dollars each year.

This would be bad enough if investors actually understood key differences in firms’ conflicts, obligations, and revenue streams. If that were the case, at least investors could consciously decide whether to do business with particular firms, fully aware of the attendant risks. Unfortunately, countless studies have shown that investors’ current awareness of these considerations is limited, such that they are poorly equipped to protect themselves. The current disclosure system allows firms to hide their revenue streams and conflicts. It also does not effectively communicate that less conflicted options are available.

We encouraged the SEC to raise the legal standards for advice and protect the public from misleading marketing.

Although we believe that Form CRS could help investors make better choices and drive positive changes in the market for financial advice, disclosures are not enough. We explained that the SEC should raise the legal requirements for broker-dealers, who are currently allowed to favor their own financial interests when they make recommendations. That is, they can recommend investments that make them more money, even if another investment would better fit your needs. We also explained that the SEC needs to enforce clearer rules for how financial firms market themselves to consumers.

…we agree with the Commission’s proposal to prevent broker-dealers from describing themselves with the terms “advisor” or “adviser.” Broker-dealers who use these terms cause significant confusion regarding the nature of the services they provide and the standards of care to which they are subject. But the Commission should go even further and preclude broker-dealers from holding themselves out in a manner that is inconsistent with the nature of their services and obligations, whatever specific words they are using. Absent such restrictions, misleading marketing may well drown out any additional clarity provided by more effective disclosures.

We provided suggestions for improving Form CRS, supported by evidence

We summarized our position as follows:

  • The form should more clearly highlight how firms differ with respect to conflicts arising from product-level revenue and should clearly identify all forms of revenue associated with particular accounts.
  • The form should be better organized, streamlined, and clarified.
  • The form should better implement design principles that have been shown to facilitate visual appeal and comprehension.

We don’t just believe that these changes would make Form CRS more effective, we’ve confirmed it through our own investor testing.
That testing indicates that our proposed form, which makes the enhancements listed above, materially improves the form’s value to investors.

We explained how these suggestions would support the SEC’s goals and build upon their proposal:

We also agree with many of the fundamental principles that inform the Commission’s approach to the design of Form CRS. For example, the Commission seeks to provide concise information regarding certain fundamental characteristics of a firm in a clear and easily digestible format. That is, rather than simply replicating existing–and potentially sprawling–disclosure documents, the Commission has set out to create something new that is more focused, more compelling, and more digestible. The Commission has publicly emphasized its desire to standardize the format of Form CRS and certain aspects of its content to facilitate high-level comparisons by investors. Finally, the Commission has explained its desire to incorporate design principles and to test the effectiveness of its disclosure with real investors.

We explained that our suggested improvements to Form CRS were intended to help focus investors on three fundamental distinctions among investment firms:

  1. Obligations: (1) Fiduciary (investment adviser), or (2) “Best Interests” (broker-dealer)
  2. Fee Methodology: (1) Asset-based, or (2) Transaction-based
  3. Alignment of Interests: (1) Level-fee, or (2) Variable-fee

To anchor the document on this framework, we designed a summary module that succinctly conveys these key distinctions and serves as a roadmap for the rest of the document. In our view, this should facilitate both comparisons and comprehension. It is effectively an application of the concept of layered disclosure referenced by the Commission in its proposal.

 

We then reorganized the structure and content of Form CRS around these three key distinctions, stripping out certain information less critical to the core objectives articulated by the Commission (or that could effectively be addressed in other disclosure documents). As a result, even though our proposed form retained the “Additional Information” and “Key Questions to Ask” sections in roughly their original, proposed state, our form had 30% fewer words. We also attempted, where possible, to more clearly define key terms and avoid unnecessarily complicated language.

The comment further explains how we tried to improve the form and the testing that we did to support our suggestions. As with our other advocacy, our goal is to help advance the state of financial advice for Americans today and going forward.

We’ll leave you with the sign off we provided to the SEC. If you’re a customer, partner, or close follower of Betterment, we encourage you to make your own voice heard about the importance of regulatory action to improve the state of investment advice and the usefulness of disclosures.

We are strong supporters of the Commission’s efforts to improve the quality of advice delivered to retail investors, as well as investors’ understanding of the options that are available to them. This is critically important work, and we hope that the Commission finds our input helpful as it finalizes its proposals, particularly our efforts to enhance and test Form CRS. We look forward to continuing to engage on this rulemaking, including with respect to any summaries of investor testing that the Commission releases in the coming weeks.

Sincerely,

Jon Stein, Founder and CEO

Ben Alden, General Counsel

Seth Rosenbloom, Associate General Counsel

Contributing Authors

Ben Alden
General Counsel, Betterment

Jon Stein
CEO & Founder, Betterment

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