Disclosure of Investment Advisor and Broker-Dealer Relationships: Impact on Comprehension and Decision Making

TL;DR

This study evaluates how SEC-mandated Form CRS disclosures influence retail investors' understanding, preferences, and decision-making, revealing improved comprehension and increased broker-dealer selection, especially among experienced investors.

Contribution

It provides empirical evidence on the positive effects of Form CRS disclosures on investor understanding and choices, highlighting market implications.

Findings

Form CRS enhances investor comprehension of investment accounts.

Disclosures increase preference for broker-dealers among investors.

Greater investment experience correlates with increased preference and better understanding.

Abstract

Recently enacted regulations aimed to enhance retail investors' understanding about different types of investment accounts. Toward this goal, the Securities and Exchange Commission (SEC) mandated that SEC-registered investment advisors and broker-dealers provide a brief relationship summary (Form CRS) to retail investors. The present study examines the impact of this regulation on investors and considers its market implications. The effects of Form CRS were evaluated based on three outcome variables: perceived helpfulness, comprehension, and decision making. The study also examined whether personal characteristics, such as investment experience, influenced the disclosure's impact on decision making. Results indicated that participants perceived the disclosure as helpful and it significantly enhanced comprehension about the two types of investment accounts. Critically, participants also showed increased preference and choice for broker-dealers after the disclosure. Increased preference for broker-dealers was associated with greater investment experience, greater comprehension gains, and access to more information from a longer disclosure. These findings suggest that Form CRS may promote informed decision making among retail investors while simultaneously increasing the selection of broker-dealer accounts.