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What we all feared: 'Better' disclosure yields worse results, according to Yale professor's study

At an exclusive think-tank style conference on the Potomac, industry leaders heard the psychology behind investors' rosy view of the world.

Monday, September 27, 2010 – 5:18 AM by Elizabeth MacBride
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Daylian Cain: Disclosure is like a sugar pill. If it somehow relaxes us, than it does real harm.

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Mentioned in this article:

LPL Financial
Asset Custodian
Top Executive: Dan Arnold

MarketCounsel | Hamburger Law Firm
Consulting Firm, Compliance Expert, Legal Services for RIAs
Top Executive: Brian Hamburger

FS Investments
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Top Executive: Michael Forman, Chairman & CEO




Jeff Spears

Jeff Spears

September 27, 2010 — 2:29 PM

Let the propoganda machine begin!

While I know disclosure alone won’t solve the problem of dishonest advice, it will help some investors and that is a huge win.

There are people who stopped smoking when the disclosure rules changed and if one life was saved that is good enough for me!

Tim

Tim

September 27, 2010 — 4:32 PM

Interesting article, it does make sense that since disclosure appeases compliance and regulators advisors/brokers feel they can continue with what helps their income more. Since compliance believes that clients have been fully informed, they don’t have a problem if more of them are choosing what benefits the advisor.

Jeff, the article said investors are more likely to be harmed. You said “it will help some investors” but presumably it will help less of them than without disclosure, so from this researcher it does not sound like disclosure is helping.

Ron A. Rhoades, JD, CFP

Ron A. Rhoades, JD, CFP

September 27, 2010 — 7:31 PM

Elizabeth’s article reveals recent academic evidence, as explored by Professors Cain and Prentice at the Fiduciary Forum in DC last week.

This research underlies the real reason the fiduciary standard is so important to both individual investors and to the profession. Disclosures simply don’t work to protect investors’ interests. This is why the ’40 Act exists (otherwise, all we would need is the ’34 Act and ’33 Act, which already contain modest disclosure regimes).

Yet, despite all the academic evidence (and, evidence from my own extensive experience in dealing with clients) that disclosures don’t work, SIFMA, many large BDs, and the insurance industry continues to tout a “new federal fiduciary standard” that relies exclusively on disclosure – and is not a real fiduciary standard at all. Why?

The real reason behind the “enhanced disclosure” argument is that the economic interests of the sell-side model are challenged. One can be paid substantial compensation as a professional fiduciary advisor – commensurate with the high degree of knowledge and skill possessed, and the strong duties owed to the client. But receipt of even higher forms of compensation, from third-parties (often undisclosed, or inadequately disclosed) must generally be avoided. In essence, for the major wirehouses, their entire business model is challenged by the application of the fiduciary standard. No wonder they desire to weaken the fiduciary standard, to some “new federal fiduciary standard” based on disclosures (which don’t work) alone.

It is incumbent upon consumer advocates, and those financial advisors who desire a true profession of financial advisors / investment advisers, to continue to inform the SEC, and Congress, of the true nature of the fiduciary standard of conduct. It requires adopting the clients’ interests as your own. It means acting as a purchaser’s representative, first and foremost – not as a sell-side conflict-ridden product-pusher.

The fiduciary standard requires much more of investment advisers – it requires a fiduciary culture within the firm, embraced by each person in the firm individually.

Proper management of a conflict of interest, if it is not avoided, must be undertaken. Disclosure alone does not satisfy the duty to act in a client’s best interests.

It is submitted that there does not exist any client, when understanding not only the existence of a conflict of interest and its ramifications, who would ever provide INFORMED consent to an action which would harm his or her interests.

Stephen Winks

Stephen Winks

September 28, 2010 — 5:51 PM

Disclosure of a conflict does not eliminate the conflict, thus Cain and Prentice establish the empiracal case for disclosure exacerbating conflicts of interest rather than resolving them.

Brilliant work at an opportune time when the SEC is reasoning through the entire advice thesis, as usual Ron Rhoades context enriches the discussion.

SCW

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