Most investment professionals, including CFA charterholders, figure that more disclosure about financial advisors’ conflicts of interest will help investors.
Not so, said Dan Ariely, author of Predictably Irrational, to the CFA Institute’s annual conference on May 16. In fact, disclosure may not improve investors’ decisions.
Two countervailing forces apply when a financial advisor reveals conflicts of interest, said Ariely.
Let’s assume the financial advisor tells a client that he’ll receive a higher payment if the client chooses Fund A over Fund B.
On the one hand, the client will tend to discount the advisor’s opinion because of the potential bias, said Ariely. On the other hand, the advisor will feel freer to push Fund A because he has revealed his conflict. Ariely believes that this second force will overwhelm the client’s discounting of the advisor’s opinion. As a result, investors end up no better off despite disclosures.
You can watch Ariely present
Some of Ariely’s past presentations have been captured on video. You can view Ariely on YouTube.
Follow the CFA Institute’s annual conference
You can learn about presentations at the CFA Institute’s annual conference as they occur. Read the CFA Institute’s conference blog or follow the conference using the #CFA 2010 hashtag on Twitter.
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