Financial Advisor Disclosures are Working Against You

It's official: we're too nice.

Imagine that I'm a financial advisor and you come to me wanting to buy an annuity. I offer you two kinds, a plain vanilla deferred annuity, which pays a guaranteed amount, or a variable annuity, which has a payment stream that's partly determined by the performance of the underlying investments.

I explain the costs and benefits, recommend the variable annuity for whatever reason, and then disclose to you that my commission for the variable annuity is twice that of the deferred annuity.

Which one would you choose?

Turns out, most people would feel pressured to take my adviceA series of experiments studying conflict of interest disclosures found something interesting: we tend to feel pressured to follow a person's advice after they make this kind of disclosure.

And in a world with a lot of conflict of interest disclosures, that's pretty worrying.

In the financial industry alone, there are myriad conflicts related to things like commissions, management fees, and all the other little fees that make the industry hum. Feeling pressured to go with biased advicecan thus render the whole disclosure concept meaningless, as we end up doing exactly what a disclosure is intended to warn us against.

Where does this pressure come from?There are a couple potential reasons we cave in to biased advice.

One is what psychologists call the "panhandler effect," where we develop a desire to satisfy an advisor's interests once they become known. It's a social pressure thing, where we want to show the other person that we're cooperative and generous.

We also tend to associate disclosures with professional standing. Weirdly enough, advisors with more disclosures are perceived as higher status in their industry, making us want to defer to their greater knowledge and judgment.

Unfortunately, this is often not to our benefit.

Disclosures can also give advisors what's known as "moral license." Once their economic interests become common knowledge, advisors have fewer personal and professional reasons to act in a way that ignores these incentives. In other words, once everyone knows that I get paid more for offering you a variable annuity, I lose any qualms I had about suggesting it -- the common knowledge of my compensation eliminates any ethical shame I might have otherwise felt about the recommendation.

Our uneasy relationship with biased adviceThe other problem is that, far from feeling great about giving our advisor the benefit of the doubt, we tend to feel a little bit queasy about taking biased advice.

As the study authors put it, we know that the advisor doesn't have our best interests at heart, and we don't like that about them or about the situation. Unfortunately, our social graces make us more likely to go along with the advice and, in the end, feel less satisfied.

How to avoid those icky feelingsGenerally speaking, social pressure is strongest in person. That means the most effective way to keep a level head is to avoid making any decisions while you're in the same room as your advisor.

Instead, master the art of the delaying tactic. This allows you to still be super nice and retain your social norms, and gives you a chance to clear your head and privately consider what you want to do later on.

Then, when you're ready to share your decision, keep it impersonal. Instead of calling or visiting your advisor, send an email, or, if you're really into being impersonal, try a Whatsapp. Whatever you choose, keeping some distance will make the "no" a lot easier on you.

So avoid the fallout of bad advice and your fabulously good nature by taking the "social" out of the social pressure equation. You'll find that you can then use those disclosures to your full benefit.

The article Financial Advisor Disclosures are Working Against You originally appeared on

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