The Burden of Disclosure…

Canadian regulators seem to be hooked on disclosure (CRM, Point of Sale, etc) at a time when many international regulators acknowledge it is insufficient on its own to bridge the natural asymmetry of information in the market place or to direct advisor/adviser behaviour in the investor’s best interests. But disclosure is relatively inexpensive and as Sunita Sah and other academics point out, it is less disruptive to the status quo.  I can see why the industry would favour it, but not necessarily why a regulator should be so enamoured of it.

One of the most interesting topics at the IFIE/IOSCO Investor Education conference was a talk by Sunita Sah,  Assistant Professor of Business Ethics at Georgetown University, on the emotional dynamics disclosure. 

The talk mirrored a recent paper of her’s and Loewenstein G., & Cain D. (2013): The Burden of Disclosure: Increased Compliance with Distrusted Advice. Journal of Personality and Social Psychology, Vol 104(2), 289-304. doi: 10.1037/a0030527. 

In a nutshell, in the studies conducted for the paper, while the existence of a conflict of interest that was not communicated to an advisee led to conflicted advice, disclosure of that conflict lead to a significantly higher level of acceptance of biased advice, even though the advisee was less pleased with the outcome and less trusting of the relationship.  There appeared to be more “pressure” to help the adviser, with advisees feeling more uncomfortable about turning down conflicted advice in the presence of disclosure.   

Now the studies themselves said nothing about the propensity of advisors/advisers to give conflicted advice, but what they clearly demonstrated was that disclosure of a conflict puts those in receipt of conflicted advice in a dilemma.  While the relationships studied were ephemeral, the pressure on a client in an advice based relationship would, one assumes, place a greater pressure on the advisee given the existence of a higher level of implied trust. 

I will not spend time dissecting the paper or the research, but will refer you to a blog post at the British Psychological Society.    However, Canadian regulators seem to be hooked on disclosure at a time when many international regulators acknowledge it is insufficient on its own to bridge the natural asymmetry of information or to direct advisor/adviser behaviour in the investor’s best interests.  But disclosure is relatively inexpensive and as Sunita and other academics point out, it is less disruptive to the status quo.

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