The SEC’s client relationship summary (form CRS) fails consumers. CRS, meant to inform the public about BDs and RIAs, instead confuses everyone. Investors do not understand CRS. RIAs do not understand they can describe their fiduciary status on CRS.

These are key findings of recent reviews of CRS submissions by my organization, the Institute for the Fiduciary Standard, and The Plain Language Group.

CRS failures should not be dismissed because disclosure typically fails to properly educate consumers. CRS is unique. It performs a duty at the core of the mission of the Investment Advisers Act of 1940. This is to inform investors about investments and advice.

Its complete failure is deeply troubling.

The Institute reviewed 41 CRS forms from among the largest dually registered (29) and independent RIA (12) firms and The Plain Language Group separately reviewed a sample of these firms. The report is here.

The SEC says CRS is meant to reduce investor confusion. SEC Chair Jay Clayton said CRS shows investors how BDs and RIAs help investors in “significantly different ways,” which is material information.

The Institute review suggested material facts about how BDs and RIAs differ are either entirely omitted or overlooked in “crammed” pages of too many words. The key findings from the Institute’s research were the following:

• Among dual-registered BD/RIA CRS forms, many material facts were omitted. None stated that the BD standard is a lesser, more conflicted or more limited standard. They did not state that the BD standard only applies when a recommendation is made or that the BD acts as an agent for and has a duty of loyalty to issuers.
• Among the same 29 dual-registered RIAs, only 12 used the word “fiduciary” and only one firm described fiduciary as a higher or broader standard than is the BD standard.
• Only two firms, among the 12 independent RIAs, cited and described the fiduciary standard as a higher or broader standard.

The Plain Language Group review included CRS forms from Ameriprise, Commonwealth, Equitable Advisors, Royal Alliance, Sage Point Advisors and Wells Fargo. Among its key findings:

• All six firms need improvement if we are to create a form that investors can understand.
• On a readability test, five of the six forms simply “failed.”
• There is too much information crammed on each page with sentences and paragraphs that are too long; forms used small typeface, lacked visual appeal and were loaded with financial jargon.

The key finding of both reviews: CRS fail investors.

The Institute also tested an additional random selection of 30 “fee-only” firms from the Investment News database with AUM between $1 and 3 billion. From these 30 firms, the Institute found just two that mentioned and described the fiduciary standard as higher or broader than the broker-dealer standard.

Among those firms, 93.3% omitted describing their fiduciary duty on CRS. RIA’s widespread omission of fiduciary portrays their confusion about CRS. This confusion is inexplicable and due to the mixed messages in CRS guidance on the use of the word “fiduciary.”

The result: RIA confusion.

And it is frustrating for RIAs. Independent RIAs know best the sharp differences between their and BD basic business practices – the largest wire-house and bank BDs especially. These differences are well-known but not well publicized. Recruiter Mindy Diamond’s recent piece brings some to light. Diamond described Merrill Lynch’s efforts to stave off its thundering herd from galloping off in its Project Thunder: Recruiter cites rumblings from Merrill advisers about Project Thunder – InvestmentNews.

According to Diamond, the crux of complaints by brokers is that Merrill Lynch acting like … a broker-dealer. Diamond cited as examples Merrill withholding the top 3% of a broker’s monthly revenue, pressures to cross-sell BOA products and strict sales incentives to “avoid a 100-basis point reduction in their payout and a percentage point if they do not grow customer assets by 2.5%.”

Diamond added that Merrill advisors are not bad actors. She said in a telephone conversation that “with the corporate agenda, they don’t have complete agency over their own professional life.” She also noted that while Merrill Lynch brokers may generate more complaints, the other big bank BDs are also blamed for similar policies.

What should an independent RIA disclose in CRS? Here is sample language for an RIA that highlights material facts that expose differences between RIAs and BDs:

• As an investment adviser, we always act as a fiduciary to you and put your interests first, while, by law, a broker-dealer is not required to put your interests first.
• Fiduciary applies, by law, to “the entire relationship between an adviser and its client,” while the broker-dealer standard only applies “when the recommendation is made.”
• As a fee-only investment adviser fiduciary, you only pay a transparent set fee for our advice.
• We do not make products, and we do not trade or sell securities to you for third parties to earn commissions. We are not paid by third parties to advise you.

The SEC’s guidance on CRS confuses RIAs. CRS fails investors. These failures should not be dismissed because disclosure often fails. CRS is not a fund prospectus or a quarterly filing. It is brief and purpose-driven. It performs a unique duty at the core of the purpose of the Investment Advisers Act of 1940. It can be made right to fulfill its fiduciary duty through additional guidance.