So, What IS The Point Of Financial Advisers?

Conflicted

Consumers of environmentally friendly products are more likely to steal; and advisers who disclose their conflicts of interest are more likely to do the same – although they’ll call it something different, of course. Performing a morally good action will often give us the spurious moral justification for doing something bad.

Disclosure is the lawmaker’s go-to action when they need to be seen to do something, because it costs little and is easy to mandate. Unfortunately it comes with a slight problem: it doesn’t work. Conflicts of interest need to be avoided, not managed.

 

Green Thieves

A study by Nina Mazar and Chen-Bo Zhong, Do Green Products Make Us Better People? found that people who bought more environmentally friendly products were more likely to steal or cheat than people who bought conventional products. The hypothesis for this, in line with many other similar studies, is that having established (at least to themselves) their impeccable moral credentials they then promptly give themselves license to behave immorally: an effect known as moral licensing.  As in so many areas of psychology there’s no give without take and no action without a corresponding unintended consequence.

From this point it’s a short jump to considering the effect of disclosure on a financial advisor. After all disclosure of a conflict of interest, even when legally mandated, is an unambiguously positive moral act, isn’t it? And once you’ve done something good, as our green consumers show, it’s perfectly OK to do something morally dubious, isn’t it?

Now, boys and girls, what do you think the naughty financial adviser is likely to do with their license to misbehave?

 

And The Point Is?

In fact we’ve looked at the problem of disclosure before, in Disclosure Won’t Stop a Conflicted Adviser, where we saw that disclosure actually tends to make advisers behave worse than before. Which is a rather unfortunate result of an action intended to make advisee’s lives easier: because, of course, it has the unintended consequence of making them worse.