Does the disclosure received by retail investors help them to make optimal investment decisions?”

I was happy to attend the Capital Markets Institute’s discussion on disclosure at Toronto’s Rotman School of Management.  But some 3 and a 1/2 hours after the start, the panellists had still not answered the headline topic of discussion: “Does disclosure help investors make optimal investment decisions?”

Outside of the academic presentations by Sunita Sah and an interesting but jocular presentation on behavioural issues affecting choice, focus seemed to be almost entirely on documentation underpinning investment details, costs and performance, i.e. the disclosure of detail. 

I asked a question:

Given the discussion topic, the fact that it is data +algorithms that = output, what did the panel consider to be an optimal decision and who was responsible for constructing it? 

Only one panel member attempted a response but none appeared to understand the significance.  I found this both disturbing and absurd! 

No form of disclosure is of use without a structure and a set of decision rules through which to process the information.  This process creates the accountability for the decision.  If the investor is responsible it must be the investor’s process and vice versa.

Investors generally believe that the advisor possesses the process and this is effectively true in today’s retail market and why the UK and Australia have gone ahead with best interests standards.

Canada does not seem to be believe that process, structure and its decision rules are material.  They would like to hold investors responsible for what they still appear to regulate as a set of discrete independent transactions.   Simple data with no algorithmic/decision rule construct = no effective/optimal investment decision whatsoever.

There is an outstanding best interests standards review that followed on from the 2004 assassinated Fair Dealing Model, itself initiated around about 1999, that is still to bear fruit, but I would place some weight on Mary Condon’s words as perhaps a good guide as to what regulators think and are going to do…

Mary said that the Client Relationship Model currently being implemented would be a good experiment as to the efficacy of recent advances in Canadian disclosure, but when asked what type of experiments regulators had in mind, we were met with a wall of ummms. 

When asked about what stance investors should take when dealing with the retail financial advice industry, her recommendation was a healthy dose of scepticism. 

Scepticism + simple disclosure is not a solution for regulating advice and it is certainly not a platform on which investors can be reasonably assured that the advice they receive is likely to be in their best interests.

The most interesting part of the presentation was the insight into the impact of disclosure of conflicts of interests on both investor and advisor decisions.   I have heard Sunita Sah speak before.  Her research results show that where a conflict of interest exists and is disclosed investors a) are likely to feel less trusting of their advisor and b) feel more pressure to accept the advice.   The outcome of these two conflicts is that investors are more likely to accept advice that they know to be wrong when their advisor has communicated a conflict of interest.  Advisors on the other hand appear to be more biased with respect to recommendations once a disclosure of conflict of interest is made.

The Keynote speech was delivered by Susan Wolburgh Jenah of IIROC and this seemed to focus on Financial Literacy and Advisor education.   She did not touch on disclosure outside of the product. 

In all, the Capital Markets event was a bit of a let down.  The question was not answered, or even attempted. 

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