Trust Me, I Have a Conflict of Interest! Testing the Efficacy of Disclosure in Retail Investment Advice

Abstract

This study explores the psychology of disclosure in the context of advised financial investment decisions. It investigates how information about the financial advisor’s potential conflict of interest impacts on the participants’ judgement, whether as to attitudes or actions.

Participants provided a rating of their trust in the advice out of a scale of one to seven after reading a financial advertisement that displayed a handwritten note making a recommendation to invest. The advertisement also set out the fee structure of the advisor. In half of the cases, the advertisement included an additional note, one version of which explained that the interests of the advisor were aligned with those of the participant, and the other version of which explained that their interests were not so aligned.

The results suggest, first, that participants’ ratings of their willingness to invest was reliably affected by the presence of conflicts of interest only when the specific implication of the conflict was made explicit in the explanatory disclosure; and secondly, that their rating of trust in the advice was in all cases affected by the presence of a known conflict of interest, but more strongly so when accompanied by an explanatory disclosure. Even then, in ratings relating to the first-seen advertisement, the disclosure primarily affected stated trust in the advisor rather than willingness to invest, only affecting the latter when participants had the opportunity to compare offers, advice and disclosures across multiple advertisements.

The implications of these findings for public policy are that, contrary to what is commonly suggested, problems of conflict of interest in the financial investment context may efficiently be treated by means of mandatory disclosures, provided that such disclosures explicit the consequences of the conflict for the decision maker. It remains to analyse how explanatory disclosures can be drafted so that their influence on the trust in the advice also translates into modified action.

Keywords: disclosure, advice, conflict of interest, decision-making, trust