Amid the hype over providing disclosure to financial consumers, it’s important to identify when disclosure can be helpful and beneficial versus when it can hurt and confuse the client. In an article in the April issue of Research magazine, AdvisorOne’s Bob Clark notes, Michael Finke of Texas Tech argues that disclosure can not only fail to help consumers but also contribute to declines in the quality of the products and advice they receive.
One of the primary challenges associated with financial disclosure is well known: knowledge limits — meaning that many consumers simply don’t possess the background knowledge of financial matters to understand the implications of the information presented to them. The more information a client gets that they don’t know what to do with, the more confusing it becomes. Finke cites a 2011 study by Sunita Sah of Duke and Carnegie Mellon which found that recommendations given to the consumer had a far more negative impact if the advisor had to disclose conflicts of interest. Adding insult to injury, Suh found, “The client now feels that if they don’t accept the advice, they are admitting they don’t trust the advisor.”
Despite Finke’s warnings about the negative consequences of disclosure, he notes that disclosure has been positive for many sectors of the financial industry, where it is simple to use. Examples include 30-year fixed rate mortgages, savings accounts and property insurance. These markets are competitive because it’s simple for consumers to compare one number for products that have similar characteristics.
