Is Too Much Disclosure A Bad Thing?
The disclosure on disclosure is this: It sometimes does more harm than good. At least, that's the view of some academics who've studied the relationship between conflicts of interest by professionals and disclosures they make to their clients. And the issue is more than academic for regulators studying potential new rules regarding the fiduciary standard of care, as well as working to increase the transparency of expenses and conflicts of interest in transactions involving investment services and products. And don't forget the rules passed last summer requiring investment advisors to give clients narrative brochures containing "plain English descriptions" of their businesses, services and conflicts of interest on Form ADV Part 2.

In deciding whether or not to impose a fiduciary duty upon broker-dealers comparable to what investment advisors currently abide by, the SEC must consider whether lesser steps--such as more disclosure by broker-dealers--would suffice, says Robert Prentiss, a business law professor at the University of Texas.

"The easiest thing for Congress and the SEC to do when they face a problem is to say, 'Let's just do more disclosure,'" says Prentiss, who wrote a paper on the limits of disclosure and has spoken on the topic at various forums. "It's not hard or expensive to do, and the notion is that getting more information to investors will solve the problem."

But Prentiss says increased disclosure doesn't solve the problem because it can overwhelm investors with information that is often beyond their ability to meaningfully comprehend. And, he wrote in his paper, studies of informed consent show people correctly remember only about a third of basic information conveyed to them.

Perhaps more important, Prentiss cites academic research that shows when a group of professionals (in this case, stockbrokers) disclosed a conflict of interest to their clients (i.e. they get paid by what investment they put the client in, and sometimes they can benefit financially from promoting a stock or other investment versus giving unbiased advice), it can give brokers the moral license to provide even more biased advice.

"It's sort of a caveat emptor," says Daylian Cain, a professor at the Yale School of Management who has researched the topic. "Even people who try to give their client the best advice may be unable to do so if they have a conflict of interest because years of research finds it's hard to be objective if their incentives go in the wrong direction."

Cain says one reason why disclosure is often an ineffective consumer protection tool is because people tend to trust their advisor (or doctor, lawyer, etc.) and don't believe they would steer them wrong. He says people need to realize that disclosure should warn them to be wary of not only "corrupt" information, but also unintentionally biased information.

"I don't think anyone would argue with the proposition that there are problems with disclosure," says David Tittsworth, executive director of the Investment Adviser Association. "There's a tension between how much disclosure is required and whether or not people will read it. But I think anyone who points out the deficiencies of disclosure needs to suggest a better approach."

Maybe the best approach is for Congress and regulators to tackle tough issues rather than punting by calling for more disclosures.

"The positive effects of disclosure are massively exaggerated," says Cain, who notes that additional disclosures can do indirect harm if they replace more effective measures. "I tell regulators that disclosures do a lot less than you think and that conflicts of interest are a much bigger problem than you think."

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