“Jump at your own risk.” Standing on the edge of a cliff, looking down at the water, seeing people jump, it doesn’t look that dangerous. If others are doing it, you do the same. So why is there a warning on the top of the cliff?
We see the warnings ‘past performance is not a guide to future returns’ but all the providers issue charts and documents that explain and show past performance…all of which you are supposed to ignore.
In a study, Disclosure: Psychology Changes Everything. The writers ‘review literature examining the effects of laws and regulations that require public disclosure of information. These requirements are most sensibly imposed in situations characterised by misaligned incentives and asymmetric information between, for example, a buyer and seller or an advisor and advisee.’ The words, misaligned incentives are important. The reason for disclosure is to balance up the unfairness of misaligned incentives. But just because you disclose it, it doesn’t mean people take notice? You may jump as everyone else has!
Also if disclosure doesn’t help consumers, and producers know that consumers ‘don’t really read the small print’, why should a producer change their behaviour? The writers conclude “Unfortunately, disclosure of misaligned incentives can have perverse effects on the producer side of the equation. Specifically, advisors who would have otherwise been intrinsically motivated to provide unbiased advice can feel morally licensed to provide biased advice once a conflict of interest has been disclosed. And because of insinuation anxiety, advice recipients may feel greater pressure, with this disclosure, to follow the now less trusted advice”
Ouch! That’s some conclusion.
There are so many wealth managers, private banks etc that whilst making disclosures, consumers still buy. Rather than helping consumers be more diligent in their decision making, the providers know they can persuade investors to proceed. To offer biased advice.
Is there another way? The answer is yes. As a consumer you are probably not influenced by disclosure notices, so you need someone to help you who is. The way to remove the misalignment of incentives and to tip the balance in favour of the investor rather than the provider is to have a better understanding. We call it having your own financial bodyguard. Without someone to help balance out the misaligned incentives, inevitably, the provider’s story will always take precedence, even though it may not appear to be the case at the time!