In today’s overhyped world, we often seem way more interested in “doing something” than actually solving—or even addressing—the problem in question. Sadly, it seems to me that in our haste to act we often do more harm than good. I suspect this is, at least in part, because many of us who want to make things better avoid considering that there may be peoplewho don’t—and want to get paid handsomely for not doing so.
A good example of this is our current mania over “disclosure” to financial consumers. Professor Michael Finke of Texas Tech University wrote an important piece on the subject of disclosure in the April issue of AdvisorOne sister publication Research that should be required reading for anyone interested in financial regulation. In it, he convincingly argues that financial disclosure, as it’s currently practiced, not only often fails to help financial consumers but can serve to decrease the quality of the products and advice they receive. He then gives examples of how disclosures can be used to actually help people.
Many of us are well aware of the first disclosure challenge that Prof. Finke talks about: Knowledge Limits. Many people simply do not possess the background knowledge of financial services to understand and apply much of the “information” that is currently disclosed to them. “For disclosure to work, he wrote, “those who get the information need to know what to do with it…And more information makes the problem worse.”
Then Finke gets to the heart of the matter, citing a 2011 study by Sunita Sah of Duke and Carnegie Mellon Universities that found that disclosure can actually be counterproductive to helping consumers in at least two ways. First, Sah found “that advisors were more likely to give self-serving advice if they first disclosed a conflict of interest to their client. The advisor now feels less pressure to make a recommendation that isn’t self-serving.”