Read the full report, Improving Fee Disclosure through Behavioural Insights (OSC Staff Notice 11-787)
Learn more about how behavioural biases affect your investing decisions. Visit our Behavioural Insights hub.
August 19, 2019
Introduction
The OSC is committed to improving the retail investor experience by helping investors make better‐informed investment decisions. We have published Improving Fee Disclosure through Behavioural Insights, a research report that identifies behaviourally informed ways to improve how investment fees are communicated to investors by their registered dealers, advisers, and their registered representatives (registrants). The report also includes the results of a randomized experiment that evaluated several of the approaches proposed in the report.
Purpose
The goal of this project was to identify practical applications of behavioural insights that will lead to better investor experiences and market participant outcomes. We partnered with the Behavioural Insights Team (BIT) to research how registrants can make their annual reports on charges and other compensation (fee reports) more useful for their clients. The report also provides insights on how other stakeholders can support investors’ review and use of the annual fee reports.
Previous studies have suggested that firms may be able to improve the design and delivery of these reports. While many investors are benefitting from the information included in their annual fee reports, these studies find that others may not be noticing, reading or understanding these reports.
Background
Behavioural insights illustrate the challenges people face engaging with financial disclosures: literacy or language challenges, innumeracy, and low familiarity with specialized concepts and terminology used in the investment sector can impede individuals’ understanding and use of these disclosures.
The OSC Investor Office partnered with BIT to conduct research on how registrants can increase the effectiveness of their annual fee reports in the context of their relationships with their clients, and how other stakeholders can support investors’ review and use of the annual fee reports delivered to them. This continues the OSC Investor Office’s focus on improving the investor experience through the application of behavioural insights, promoting the use of plain language, and other initiatives.
Key findings
Proposed Initiatives and Tactics
The findings of the research are described completely in the full Improving Fee Disclosure through Behavioural Insights report. The report identifies 24 concrete tactics registrants and other stakeholders can use to mitigate the following key barriers to investors’ using annual fee reports as intended:
Barriers to engagement: Investors may not notice or recognize the importance of their annual fee report amid the various other disclosures provided to them.
To reduce the likelihood of this occurring, registrants can send the report by mail and use language or visuals on the envelope to emphasise its importance.
For reports sent digitally, registrants could send investors an alert or notification that grabs their attention. This should serve as a reminder and communicate the importance of the fee report.
Barriers to comprehension: Investors may be confused by the terminology and information included in their annual fee report.
They may not understand which fees are included (and which are excluded) from the report, and lack reference points to determine whether their fees are higher or lower than the norm.
Much of the language used in Annual Fee Reports is complex and this limits investor comprehension. Registrants should use simpler terms to describe key concepts and different types of fees. Where complex language is unavoidable, a plain language explanation of the term should be made available to clients.
Barriers to action: Even if investors see and understand the report, they may not know how to act on the information it provides.
Investors may not be aware of products or services that could help meet their needs at a lower cost or that making fewer transactions might reduce fees without compromising returns.
Providing investors with a simple list of potential actions could help close this knowledge gap in a way that imposes little strain on investors attention.
Results from the Experiment
Several of the tactics identified in this report were tested in a random experiment with 1,900 Canadian investors. Each participant reviewed one of four versions of an annual fee report and then were asked several comprehension questions to test how well they understood the information.
The baseline (or “control”) version was based on a sample fee report that was created by the Canadian Securities Administrators. Investors who received the highest performing alternative scored 7% higher comprehension scores than those that received the control. This trial outcome suggests that registrants can use behavioural insights to present the required disclosure in clearer and more engaging ways.
Looking Forward
We encourage registrants to review the findings of the Improving Fee Disclosure through Behavioural Insights and encourage them to test methods of designing and presenting annual fee reports that they believe their clients may find more intuitive. For example, using an interactive webpage rather than a hard copy or PDF. We also encourage registrants to share their findings with us and with other stakeholders that could benefit from them. We look forward to engaging with investors, registrants, and other stakeholders with respect to these findings and our broader work to improve the investor experience.
Read the full report, Improving Fee Disclosure through Behavioural Insights (OSC Staff Notice 11-787)
