The Downside of Disclosure

The wealth management industry has a trust problem — and that's not even the bad news.

Consumers' lack of trust in wealth management providers is well documented. Nearly two-thirds of those surveyed in a 2016 American Association of Individual Investors poll said they didn't trust financial advisors. More recently, the 2019 Edelman Trust Barometer found that Financial Services was the least trusted industry in the eyes of consumers.

The worse news, however, is that the industry's preferred instrument for narrowing this trust gap might actually be widening it.

That instrument is consumer disclosure, and it has long been the wealth management industry's go-to strategy for cultivating trust, by trying to provide transparency in fees, conflicts of interest and other thorny topics.

However, as currently practiced in financial services (and most businesses), consumer disclosure is far from the elixir the industry purports it to be. If anything, it is the antithesis of transparency, for two key reasons.

Disclosure Downside #1: Readership

First, hardly anyone reads disclosures. Admit it — as a consumer, when was the last time you read one?

Amazon.com has underscored this point in a most amusing fashion via the Terms of Service it provides to software developers who use its Amazon Web Services (AWS) platform. In the excerpt below, Amazon explains that customers can't use AWS software to build "life-critical or safety-critical systems."

Section 57.10. Acceptable Use; Safety-Critical Systems. Your use of the Lumberyard Materials must comply with the AWS Acceptable Use Policy. The Lumberyard Materials are not intended for use with life-critical or safety-critical systems, such as use in operation of medical equipment, automated transportation systems, autonomous vehicles, aircraft or air traffic control, nuclear facilities, manned spacecraft, or military use in connection with live combat. However, this restriction will not apply in the event of the occurrence (certified by the United States Centers for Disease Control or successor body) of a widespread viral infection transmitted via bites or contact with bodily fluids that causes human corpses to reanimate and seek to consume living human flesh, blood, brain or nerve tissue and is likely to result in the fall of organized civilization.

However, as the highlighted section shows, the agreement lifts this usage restriction if the U.S. Centers For Disease Control declare the presence of a "widespread viral infection transmitted by bites or contact with bodily fluids that causes human corpses to reanimate and seek to consume living human flesh … and is likely to result in the fall of organized civilization."

Yes, you read that right … Amazon is disclosing a contingency for the Zombie Apocalypse. If that catastrophe befalls us, then you're allowed to use AWS software for whatever you need to survive.

The fact that the flesh-eating undead can be referenced in an official document like this, without hardly anyone noticing, speaks to a larger and more serious issue: Disclosure documents are an awful way to communicate important information to your customer.

Companies bury important details in opaque disclosures that they count on no one reading. Examples abound: coverage exclusions for your insurance, service fees for your bank account, cancellation fees for your gym membership, price hikes for your cable TV package, and — of course — conflicts of interest for your financial advisor.

Organizations hide behind these disclosure documents and point to them as evidence that anything important is indeed revealed to the customer. The reality, however, is that many companies (and sometimes entire industries) use disclosures to convey information that they don't really want anyone to see.

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.