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Outcry for Regulatory Reform and Transparency Paves the Way for E-Delivery and Consent Strategies

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Originally appeared in MiFID Monitor

By Len Driscoll, chief client officer at NewRiver

The fallout from the recent financial market turmoil and the looming presidential election have created a ‘perfect storm’ for a regulatory impact to hit by year end. After a decade of false starts and failed attempts at fixing the cumbersome, costly ‘big book’ prospectus, recent activity across the financial securities landscape holds strong promise that change may finally be here.

Major milestone and indicators include the fact that the Securities and Exchange Commission(SEC) closed its comment period on the summary prospectus on 29 August and is expected to move from a proposed rule to an industry mandate before year end. The Department of Labour has released proposed regulations for fee disclosure, and is collaborating with the SEC on a hybrid of the summary prospectus for its 65 million retirement plan participants. Also, the National Association of Variable Annuities (NAVA) has spearheaded an industry backed initiative to create operational standards for a totally electronic ‘paper free’ process to write new business – including e-signature – that meets the regulatory requirements of all 50 states.

Underlying all these initiatives is a common goal to reduce costs and paper waste, while communicating more clearly and efficiently to investors. The best method to achieve these objectives is to adopt an e-delivery strategy with investors, where they forgo using paper-based delivery and instead opt for electronic communications.

E-Delivery: A Green Solution That Saves Greenbacks
The securities industry pays US$1 billion annually to produce ‘big book’ prospectuses – those mammoth multi-fund documents that are mass mailed to investors each year. Tack on supplements, shareholder reports, statements of additional information and other regulated mailings and the tab jumps to about US$5 billion annually.

It’s not often that you can get regulators, financial firms and investors to agree – but there is universal consensus on this: the current paper-based approach to investor disclosure is too costly, cumbersome and complex. Worse, studies have found that two thirds of investors don’t read their fund prospectuses at all. And who can blame them given many multi-fund prospectuses contain 30-40 funds while the average investor has only 3-4 holdings, meaning over 85% of prospectus information is irrelevant to the end user.

Today, top tier financial firms such as Ameriprise, Citi and Fidelity are looking at implementing ‘paper off’ initiatives and reap 50-80% savings simply by moving investor communications to e-delivery. It’s widely acknowledged that e-delivery is the most cost effective form of document delivery because there are no paper, printing, postage or inventory costs. Not to mention, eliminating paper production greatly reduces a company’s carbon footprint and saves a tremendous amount of trees.
Just what are the cost savings? Based on a sampling of industry data, typical ‘first dollar’ prospectus delivery costs break down as follows:

Prospectus fulfilment method Cost per transaction* Notes
‘Pick & pack’ warehouse US$2.37 Current industry approach
Print on demand w/ trade confirm US$2.20 Combines confirm in a
single mailing to save
more postage
Mailing the proposed summary
prospectus w/ trade confirm US$1.35 About US$1 saving per
mailing off traditional pick
& pack
E-delivery US$0.50 79% savings over
traditional pick & pack – whether you send the ‘long form’ statutory prospectus or the abbreviated summary prospectus

*Estimated cost based on industry sampling for a single-fund book. Numbers may vary from firm to firm based on factors such as volume and page count.

In short, the summary prospectus will save about a US$1 per transaction and e-delivery will nearly double that, with per transaction savings of roughly US$1.87. To put the potential savings into context, the Investment Company Institute (ICI) estimates there were 298 million mutual fund shareholder accounts in the United States at the end of 2007. Assuming these accounts each receive a single prospectus mailing per year, the savings for implementing the summary prospectus would be nearly US$300 million annually and, by adopting an e-delivery program, total savings would jump to US$557 million. Factoring in 64.5 million new fund purchases, these numbers would increase even more to US$363 million and US$678 million, respectively.

And that is just the monetary savings. Reducing paper-based disclosure can have a significant impact on the environment too. According to some industry estimates, implementing the summary prospectus in lieu of delivering a statutory prospectus would save nearly 39,000 trees and 128 acres of forest each year.

Perhaps that’s why more US corporate boards and shareholders are going green. The earth’s sustainability has become a much more important part of every board’s activities. In fact, about 25% of Fortune 500 companies now have a board committee overseeing the environment, compared with fewer than 10% five years ago. Shareholders are now more active on environmental issues too with the number of investor proposals related to the environment nearly doubling from 2004 to 2008 according to RiskMetrics Group.

Investors and the internet: Why is e-Adoption So Hard?
Despite previous concerns, studies have found that the majority of investors are not only web enabled they are also web ready. For instance studies have shown that:
1. Nearly all investors are on the web: According to an ICI investor survey, 95% of mutual fund investors use the web and 73% use it daily.
2. Most older investors are on the web too: Rate of internet access and use are lower for people age 60 or older – but not significantly, as 85% of ICI survey respondents in this age range use the internet, and 55% use it daily.
3. Investors prefer the internet for financial research: Investors rank the internet as their top investment research source – outranking brokers, traditional media sources, and even tips from family and friends.
4. Here’s another surprising fact – despite the heavy online saturation, e-consent adoption rates are in the low single digits. According to a 2004 DALBAR study, firms who actively promoted e-delivery to mutual fund investors and variable annuity policyholders averaged only a 5% adoption rate – barely enough to recoup investments in marketing, technology, and operations to implement an e-delivery program. According to DALBAR, the highs weren’t very high – ranging from 9% to 12%.

So what is the hurdle when getting investors to accept e-consent? Several factors could be at play including a general distrust in using the internet for financial information and the simple fact that ‘breaking the paper habit’ requires basic behaviour modification. However, demographics have changed – in the modern digital/iPod era, Americans have stopped being passive reactors to mass media and have become active controllers of the content they receive.

Yesterday’s Passive Consumers have become Proactive ‘Prosumers’
The explosion of digital content and devices has created a change in how consumers respond to the media around them. The Silent Generation (b. 1919-45, and over 60 in 2008), the Baby Boomers (b. 1946-1964, and in their 50s in 2008), and the early Generation X’ers (b. 1965-1978, and in their 30s and 40s in 2008) all grew up in the era of mass media. But from 1990 onward, ‘mass’ gave way to ‘interactive’ as digital tools and bandwidth has turned Generation Y into producers of digital content rather than merely avid consumers.

As a result, consumers became ‘prosumers’ – proactive, producer-consumers who must be engaged with media that is not one-way, and not merely interactive but immersive. The prosumer communicates and gathers information digitally, through the internet, e-mail, text messaging or social networking sites. The good news is that paperless investor disclosure with XBRL powered ‘layered disclosure’ fits the persona of the prosumer.

What this means is that now, more than ever, is the time for financial services firms to embrace e-delivery. To do this, firms must first build an e-communications infrastructure that fits the needs of these prosumers remembering the old adage ‘different strokes for different folks.’ Enterprise-wide, e-marketing programs must be put in place that is capable of capturing the attention of the prosumer at key touch points; deliver tailored, relevant information and take advantage of the consumer and prosumer preference to access information on the internet. When done correctly, it will allow financial services firms to capture this willing audience and promote the benefits of their e-delivery offering through an interactive, electronic communications channel.

Best Practices to Get Consumers and Prosumers to e-Consent
Getting investors to cross over to the internet to accept e-delivery requires an e-marketing communications strategy personalised to each company and its demographics. No matter what the corporate culture, there are three aspects of the strategy that need to be addressed including: email address collection; an opt-in strategy to e-communications (by persona); and an ongoing e-marketing communications program that can repeatedly deliver the e-delivery messages (by persona).

The e-mail address collection strategy requires a firm-wide integration plan and should leverage the four most common methods of communicating with the end consumer. This includes: ‘transpromo’ messaging on regulated mailings that uses the white space on envelopes to promote a behaviour modification such as e-consent; phone script ‘prompts’ for call centre representatives; ‘opt-in’ alerts or pop-up messages on transaction pages and account files on the web; and ‘live’ encouragement from advisors at the point of sale and on paper applications to push investors from paper to electronic.

Finally, and most important, is the rollout of your e-communications programme – one that is carefully orchestrated by your marketing organisation direct to your end customers and to your key sellers via an advisor communications plan.

Using E-Communications to Collect Consent
With 95% of mutual fund investors using the internet and surveys showing that investors prefer the convenience of e-communications, the climate is poised for e-delivery provided you receive user consent to e-deliver their financial documents. Success in e-delivery requires much more than just a one-time e-consent collection campaign.

Your firm must first establish end user trust in the electronic channel by delivering a regular frequency of value added marketing messages that are relevant and talk to their specific consumer/prosumer personas. These ongoing e-communications will provide the vehicle in which you’ll be able to promote your firm’s e-delivery services, continually growing e-consent adoption rates and eventually breaking the dependence on paper communications altogether.

Make E-Delivery A Tri-fecta
Mutual fund investors already make extensive use of the internet in their daily lives and see the internet as ‘the wave of the future’ for obtaining investment information. In fact, internet use among senior mutual fund shareholders has grown significantly. Nearly three quarters (75%) of all mutual fund shareholders age 65 and over have internet access – up from less than two-thirds in 2005; and over 50% of these seniors are going online at least once a day. Making the move to e-delivery may take some initiative, strategising and work; however, it provides significant and organisational-wide competitive advantages. Financial services companies spend over US$350 billion annually on information technology yet the true return is not how much you spend on technology but rather how you deploy it. With a strong e-communications program, you can meet the needs of today’s online investors, reap positive bottom line benefits for your company’s and achieve greater environmental responsibility. Who would have thought that e-delivery could deliver so much green.

Len Driscoll, is chief client officer at NewRiver – creator of a central repository of mutual fund documents and data for financial services firms

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