The Downside of Disclosure

Disclosure Downside #2: Comprehension

The second reason why disclosures fail to advance transparency and trust is because hardly anyone can understand them.

These are typically large, dense documents filled with unintelligible legalese and fine print. The average investor has trouble comprehending them, as evidenced by the Securities and Exchange Commission’s own testing of its proposed “Customer Relationship Summary” form.

The Edelman 2018 Financial Services Trust Barometer found that consumers viewed “easily understood terms and conditions” as the number one factor that would increase their trust in financial services. But, as the same study revealed, a lack of information transparency is the top reason why consumers distrust this industry.

There is a fundamental misalignment between what consumers value (information transparency) and what financial services firms actually deliver (information obfuscation). That discrepancy will continue to haunt the industry until disclosures are transformed from legally mandated administrative documents into genuine displays of customer advocacy.

Moving From Confusion to Clarity

Accomplishing that transformation will require reinventing the disclosure so it clarifies instead of confuses, and inspires confidence instead of undermining it.

Here are some examples of how the wealth management industry could achieve that:

• Make disclosures obsolete. One way to attack the disclosure problem is to minimize the need for these documents in the first place. While it would be naïve to think disclosures would ever go away in the highly regulated investment business, wealth management firms should still ask themselves: Are there changes we could make in our business practices that would reduce the need for these mind-numbing disclosures? Southwest Airlines’ highly successful “Transfarency” strategy is a great example of this approach. In contrast to many of their competitors, Southwest doesn’t have to agonize over consumer disclosures because they built their business around a simplified and nearly fee-free pricing structure (i.e., no baggage fees, no ticket change fees, etc.).

• Design for visual appeal. Today’s jargon-filled disclosures not only appear to have been written by lawyers, they appear to have been designed by lawyers. No offense to the legal community, but creating documents with visual appeal is not their forte. That is the domain of marketers, and it appears those folks rarely have an opportunity to work their magic on investor disclosure documents. These documents are walls of text with little white space and few navigation clues. That might seem like an insignificant issue — marketing “fluff” — but it’s not. The layout, design and typography of a document can materially reduce the cognitive load it creates on the reader. Put simply, a visually appealing disclosure can engage and enlighten consumers much more effectively than a poorly designed one.

• Use vignettes to build understanding. Even the most jargon-free disclosures suffer from an important shortcoming — they describe terms and conditions in an almost academic fashion, detached from the realities of people’s everyday lives. One can read a disclosure paragraph and gain a theoretical understanding of a concept, yet not fully grasp its practical application. This is where explanatory “vignettes” can be used to great effect. Serving as a complement to traditional disclosure language, these are short “stories” that depict a common customer episode and more vividly illustrate how the legal terms translate into real life impacts. (Some insurers, for example, use this approach to underscore what types of calamities are, and aren’t, covered by an insurance policy.)

• Leverage other communication platforms. The way people like to consume information has changed drastically in recent years, yet disclosures have not evolved accordingly. In today’s digitally enabled world, many consumers like to learn more by watching (video) than by reading (documents). Complex concepts that are conveyed in a written disclosure could be reinforced in a more engaging fashion via a few short videos delivered right to an investor’s inbox. The mediums used to communicate investor disclosures haven’t changed in decades, but consumer behavior certainly has. It’s time for financial services firms to bring disclosures into the 21st century, and leverage the digital communication avenues that so many other industries are using to great effect.

The wealth management industry has a trust problem, and its longstanding reliance on written disclosure isn’t helping the issue.

If financial advisors want to strengthen their client relationships and instill greater trust in their profession, then they need to move beyond regulator-mandated disclosure. After all, just because something is legal, doesn’t make it right for your customer.

The key is to communicate with consumers in a clear and forthright way — and disclosures, if properly constructed, can help advance that cause.

It’s a cause that financial services firms should vigorously embrace, because when companies communicate with clarity, it sends an unmistakable signal to consumers. It’s a signal that you’re advocating for them, that you’re helping them avoid unpleasant surprises — be it in the form of excessive fees, conflicts of interest, or the zombie-induced fall of organized civilization.

And in the wealth management business, that’s the kind of advocacy that makes for a great, trustworthy client experience.

Jon Picoult is a public speaker and founder of Watermark Consulting, a customer experience advisory firm that helps companies impress their customers and inspire their employees. He’s worked with the CEOs and executive teams of some of the world’s top brands. Contact Jon at www.watermarkconsult.net, or follow him on Twitter @JonPicoult.