Three Methods to Test if Your Brochure Meets the New Plain Language Narrative Requirements for Form ADV, Part II

From: Investment Adviser Association Newsletter

by Dr. Deborah S. Bosley –

Advisers are concerned about the new requirements for plain language narratives in their brochure. They worry about added expenses, the time spent on compliance, what plain language is, etc. Meeting the requirements provides advisers a chance to build relationships with clients and prospects, and quell the public’s feeling that the financial services industry provides more doubletalk than straight talk.

Although advisers tend to fair better than financial services corporations when it comes to trust, according to a recent study by the AARP, 815 respondents indicated1

  • 92% favor requiring investment companies to disclose the costs, risks, and benefits of all the financial products they market and sell using plain language and a user-friendly format
  • 93% favor requiring companies that manage 401(k) retirement plans to explain their fees clearly on participants’ annual statements
  • 93% favor enabling consumers to check an investment adviser’s record for prior violations or professional misconduct

Transparency in communications is, in and of itself, an accelerator of customer service. Increased trust means more clients and, subsequently, higher profits. Evidence shows that the use of plain language in financial documents increases trust and corporate reputations.2

Therefore, your brochure can be a marketing document that increases customer confidence. But first, you must determine whether or not your brochure meets plain language standards. Using a typical “Investment Management Strategy” section as an example, here’s what you can do:

Conducting an Analysis of ADV

You can determine how well your new brochure meets the SEC compliance standard by conducting one or more of three types of tests: 1) readability testing, 2) close reading, and 3) usability testing.

The following analyses were conducted using an example of the entire “Investment Management Strategies” for a newly written ADV. Some of these tools may be available as part of your word processing software.

Method 1: Readability test: Table 1 shows the results of a numerical, readability test. The readability (or numerical) test results showed a reading grade level of 20 (4 years of graduate school) and a reading ease of “confusing.” NOTE: A serious limitation to readability tests is that counting syllables helps identify grade level. Therefore, the word “investment,” which has three syllables and is a word every investor would understand, tests at a high level. On the other hand, a two-syllable word like “outlay” would test low despite it being a word fewer people understand. That said, the test gives us a “snapshot” of readability, but does not tell us what to change, nor how.

Table 1: Numerical Readability Results of Original
# of sentences 25.00
Average # of words per sentence 22.12
# of paragraphs 6.00
Average # of sentences per paragraph 4.00
# of years of formal education a person needs to easily understand text on first reading 19.41 (20 = 4 years of graduate school)
Flesch Reading Ease 16.25 (confusing: see below)
Numerical Levels for Flesch Reading Ease 90-100: very easy 8089: easy 70-79: fairly easy 60-69: standard 50-59: fairly difficult 30-49: difficult 0-29: confusing

At this point, you have determined that your brochure is both confusing and requires a graduate education—likely not typical of many investors.

Method 2: Close reading: Table 2 shows the result of a close reading of an example section. A close reading means matching the guidelines for plain language against the actual strategies used in the section being tested. The close reading for compliance in ABC’s section showed several problem areas including: complex sentences, financial jargon (with no definitions), and a lack of subheadings for easy referencing, to name a few elements. This method gives you a detailed set of plain language guidelines on which to focus. For example, Table 2 shows that the sample section includes active voice throughout and, therefore, no attention needs to be paid to converting passive to the active voice.

Table 2:Plain Language Compliance in Investment Management Section of Generic ADV
Strategies Comment Met Standards Reason
short sentences Average 22 words per sentence, but many very complex sentences Yes, but… 1518 best range; 25 maximum if words readers can easily understand
short paragraphs Average 4 sentences per paragraph Yes, but… 34 sentences per paragraph maximum for easy reading; but complexity and length of sentences have precedence over # of sentences
active voice Used well throughout document Yes
wordiness Many sentences could be shortened while retaining meaning No Shorter sentences / fewer words easier to read
personal pronouns Helps readers feel information written directly to and for them No None used, but easy to use “we” for company, “you” for investor
legal financial jargon Examples: “limited discretionary basis” “passively managed” “individual equity securities” No Financial jargon used throughout
helpful design and layout No need for tables of visuals in this section N/A Use tables for numerical information
headings and subheads Few used; 35 headings or subheadings per page is optimum No Provides easy reference (finding specific information) and hierarchy of information
white space Used well Yes
lists None No Helps readers find and remember information

Method 3: The narrative in the brochure can be tested with 5-8 members of the intended audience, which, in this case, is anyone who invests through an adviser. The tester develops a set of questions that helps him or her determine how well the readers understand the document or can find pertinent pieces of information. For example, you might want to know if readers can easily find and understand the methods the adviser uses to make investment decisions. Table 3 shows typical types of questions relevant to the example that follows the table.

Table 3: Sample Questions for Usability Testing
1. What method do I (advisor) use to make investments?
2. What does “Passive asset class investing” mean?
3. What types of mutual funds do we invest in?
4. What is a “no-load” fund, and if purchased, when do you pay a fee?
Example of Textwith Plain Language Narratives Appropriate for Usability Testing

Mutual Funds: ABC typically creates a portfolio of no-load mutual funds. We may use generic models of portfolios only if the models match your investment policy. We will assign your assets among various investments depending on how you want us to manage your portfolio. Generally, we recommend that your portfolio consist of passively managed asset class and index mutual funds.

If testing shows that readers do not know what “passively managed asset class” means, you can add a definition.

Definition: Passive asset class investing means investing in broad sectors of the market based on empirical research rather than decision-making. Research that supports passive asset class investing comes from the nation’s universities and privately funded research centers, not from Wall Street firms, banks, insurance companies, and other groups not from groups that have a vested interest in the results.

Or you can eliminate the “jargon” and explain what “passive asset class investing” is in plain language. For example, you could say “We use formulas, technology, and empirical research to determine what and when to invest. Because it is impossible for us to ‘time’ the market, these tools aid significantly in making the best investments for your portfolio.”

Meeting Compliance Standards

After creating the required narratives in plain language, testing it is a critical step in determining if and how well you meet compliance standards. After testing, you will be able to revise the text using evidence instead of guesswork.

1 Consumer Financial Protection: Opinion of People Aged 50+

2 Geppert, John and Lawrence, Janice. “Predicting Firm Reputation Through Content Analysis of Shareholder’ Letter,” Corporate Reputation Review, Winter 2008.

Deborah S. Bosley, an expert in the use of financial plain language, is an associate professor of English at UNC Charlotte and Principal in the Plain Language Group. Dr. Bosley can be reached at (704) 687-3502 or Her website, www.theplainlanguagegroup. com, offers more information and examples of her work.

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