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

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  • Xiaoqing Wan
  • Nichole R. Lighthall

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.

Suggested Citation

  • Xiaoqing Wan & Nichole R. Lighthall, 2022. "Disclosure of Investment Advisor and Broker-Dealer Relationships: Impact on Comprehension and Decision Making," Papers 2206.00117, arXiv.org, revised Jun 2022.
    • Handle: RePEc:arx:papers:2206.00117
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    References listed on IDEAS

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