E-Delivery Disappointment: Investors Aren't Budging And Advisors Don’t Care Enough

If the IRS, family physicians and commercial banks all are managing to convince their clients to adopt e-delivery, why has the brokerage business so far come up short?

That’s a focus of research released last week by Pershing. Its “Closing the E-Delivery Gap” whitepaper bemoans the truly disappointing rate of electronic document adoption within the securities industry.

As a whole, the investment business is behind. In 2011, the broader Dalbar, Inc.’s e-Delivery Benchmarks study, which surveyed mutual fund, variable annuity, life insurance, employer-sponsored retirement plan firms and brokerage firms, reported less than 10% adoption—see my post at that time).

Pershing’s report discusses research that it commissioned from Beacon Strategies, a research and consulting firm. The Beacon work identified a gap between expectations of the brokerage firms it surveyed and what is the status quo.

Almost nine out of 10 (88%) survey respondents called e-delivery an important initiative. More than half (53%) expect investors to sign up for e-delivery of at least one communication. But, as the below graphic distributed by Pershing shows, “no service yet achieves adoption equal to even half of the expected level.”

These findings were published in a press release. They're expanded on in a whitepaper available by registering on Pershing’s site. Read it yourself and you’ll get the sense that the custodians are just about at their wits’ end.

Who's On The Team

The paper includes extensive discussion about why investors would adopt e-delivery (it's not for environmental reasons—just 21% care about that) and why they would decline it (security is a concern). Incentives and best practices to drive adoption are reviewed.

Here’s how Beacon assesses the involved parties:

• Custodians are the group with the greatest economic incentive to promote e-delivery. And yet, Beacon says the best practices that custodians have in place to support the initiative are “not totally on target.” They base this on consumer response data and the overall adoption rate.

• While acknowledging the technophiles who know firsthand the benefits of adopting new technologies, the report calls out advisors who are lagging behind in promoting e-delivery because they’re “constrained by technical and behavioral reasons.” Financial professionals' "lack of knowledge or support" tops the list of obstacles to e-delivery adoption, cited by almost half of the Beacon survey respondents (46%). Apathetic advisors rank higher than security issues.

• Investors are described as the least committed group, characterized by their “lack of knowledge, overall indifference and the inability to change old habits by both advisors and investors.”

Paper Isn’t Free

“Someone should have to pay for the paper.” That, the report says, is the position that custodians and other financial organizations are taking.

The cost of a paper securities business is enormous. The all-in cost of printing, mailing, handling, filing and disposing of a (full version) 40 plus-page prospectus or semi-annual report is estimated in the range of about $13 to $18 per piece. Such a waste of money, time, effort and resources.

Today, according to the report, custodians use three methods to encourage e-delivery adoption: charging retail investors (58%), charging advisors (33%), and offering a financial incentive to retail investors (42%). But again, the status quo has yet to make an impression.

In the context of slow and lagging electronic document adoption, what’s going to light the fire? Will it be a shift of more cost to investors and/or advisors?

“Charging investors for paper delivery—as little as a few cents per document—could go a long way to increase their cost-consciousness. If an investor were charged even a few cents for a physically delivered paper statement, or even more radically, charged for a 40 plus-page prospectus, then the investor would be presented with a choice. Pay a small amount to deliver by paper, or zero to deliver electronically. Paper would no longer be free,” says the report.

Beacon acknowledges “relationship pressures” that could keep the nuisance charge from ever hitting certain clients. Instead, it would be absorbed by the advisor or broker-dealer. At $13 a piece? Right, that could hurt.

It seems inevitable that one way or another and, probably with increasing urgency, the investment business will be weaned from paper.

After all, the industry has distinguished itself in all manner of ways as innovators on the product side.

And, one rarely hears that the electronic delivery alternatives are inferior to paper. (Although the Pershing report says “firms’ disparate user interfaces, processes and forms create challenges for learning and user experience. The outcome is that investors often find e-delivery more trouble than it is worth.”)

It will be an interesting transition—likely to be characterized by both carrot and stick approaches—to watch. Or, if you’re a digital marketer who believes that creative communicators have more to contribute to the team, to play a role in hastening.

Funds Celebrating Birthdays? Cheers To That

It’s silly, isn’t it, to wish a mutual fund, exchange-traded fund (ETF) or some other investment product a happy birthday?

Courtesy of Will Clayton, CC-BY

Back in the day, when I was responsible for a fund company shareholder newsletter, I used to hate it when product managers suggested that we celebrate a fund birthday. Can you say “party of one”?

But I’m not rolling my eyes so much anymore, and for two reasons.

1. Old Funds Can Be Shareholder-Friendly

There's more awareness now of the “survivorship” of funds and, in contrast, the effect that fund closings have on shareholders.

Of the mutual funds in operation in 1995, less than 40% still existed in 2013. The remaining funds were either closed or merged into other funds. This is according to a study by CFAs Daniel Kern and Gerard Cronin with Tim McCarthy, featured in a December BrightTalk presentation called “Mutual Fund Roulette: Will Your Clients Outlive Their Mutual Funds?” McCarthy’s book, The Safe Investor, was published this week and you may see mention of this study in book reviews.

If you have a venerable old fund coming up on an anniversary—and the study results suggest that it’s a reasonably good fund to still be in existence—it wouldn't hurt to show it a little love. In the best case, you're throwing a spotlight on a fund whose age gives it a certain gravitas. At the very least, a birthday message would remind your clients (advisors and shareholders) that investors in this fund were spared a closing. 

2. The Partying Can Be Purposeful

The communication surrounding a product milestone is able to be much richer today. While all we had space for in the quarterly print newsletter was images of confetti and balloons, there's so much more that can be done online.

Let's take a look at how a few funds have been celebrated.

ETF Providers Get Nostalgic

When you consider that a mutual fund needs a three-year performance record (a Morningstar evaluation threshold) just to be taken seriously, an ETF turning five may not seem like much of an accomplishment.

But many ETFs have legitimate bragging rights when it comes to innovating and opening up access to various markets. In the coming years, you may be drafted into taking part in quite a few ETF birthday celebrations.

In April 2012, iShares wrote a blog post celebrating five years of HYG (the iShares iBoxx High Yield Fund) without overcheering. It was a proportionate remembrance of the environment when the ETF launched.

"...A number of investors were skeptical. The lack of liquidity in the high yield bond space made it an asset class no ETF had dared to enter before. A Seeking Alpha article at the time declared the fund was 'effectively an experiment that can only be judged over time.'”

Today on iShares.com, you’ll still see this quiet image, which is linked to a 2012 whitepaper that recalls the 10-year anniversary and launch of the iBoxx Investment Grade Corporate Bond Fund (LQD), and with it the beginning of fixed-income ETFs.

Demonstrating Conviction And Consistency

When the ClearBridge Aggressive Growth Fund turned 30 last year, it received a full tribute on a Web page, and related communications materials all bear a Celebrating 30 Years seal.

One of the portfolio managers appeared in a natural-seeming video and made a few points about consistency—"So, I'm the new guy on the team and I've been here 17 years...." Below is a screenshot of the video, you'd have to click on it to go to the site to see it.

Reliving The Old Moves

This year is the 25th for BlackRock Global Allocation Fund, and the firm is showing its pride in a few ways. There’s a video, embedded below.

Also take a look at this interactive chart, which displays explanations of the fund’s positioning along a timeline while at the same time adjusting its risk and return chart. Slick.

If a "Celebrate Fund XYZ" meeting pops up on your calendar, don't go with a bad attitude. The party planners will be looking to you to bring the digital fireworks.