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Editor's Letter: March 2015

Editor's Letter: March 2015

Too much information

Last week President Obama, in a speech to the AARP, publically rallied support for the Department of Labor’s proposal to enact a fiduciary standard for advisors to retirement portfolios. 

Whatever your feelings about Obama’s recent turn toward progressive economic populism, the speech did focus the public’s attention on the possibility of conflicted advice when it comes to individual retirement accounts (IRAs), even if many still have only a faint idea of the issues at play. (Oh, we’re being screwed by Wall Street? What else is new?) Yet the topic was a top headline, at least for a day. 

It’s impossible to know what the proposal looks like, but my guess has been that it will leave some forms of commission-based sales practices extant (DOL officials have said as much) and look to “improved transparency” and mandated disclosures to help illuminate the right path for an individual investor. Transparency and disclosure seem to be the starting point of any conversation around the fiduciary topic. Advocates like The Institute For The Fiduciary Standard, in their recommendations for fiduciary “best practices,” repeatedly call for greater transparency and disclosure.

But it’s becoming clear that mandated disclosures, no matter how well intentioned, don’t work. In fact, they can actively work against their intended purpose.

In their recent book More Than You Wanted to Know: The Failure of Mandated Disclosure, Omri Ben-Shahar and Carl E. Schneider survey the academic research and make a strong case that we’re drowning in a sea of ineffective mandated disclosures—everything from iTunes’ agreements and ATM fees to prescription drugs and the reams of financial disclosures requiring 50-plus signatures when one gets a mortgage and closes on a house. Mutual fund management fees are some of the most readily available disclosures, yet my guess is few everyday investors know what they are or what they mean for their long-term financial savings. 

Disclosures are popular because they are an easy, go-to regulatory fix—who is against transparency? But it’s hubris for advocates to think these rules have an effect, the authors argue. Even in their most palatable forms, they don’t fit how most people process information and make decisions. They also assume a literacy or numeracy that isn’t always present in the intended audience. “Mandated disclosure is at core an enormous educational enterprise of a kind academics may enjoy but that most people do not. Most people have little reason to think that the yield from studying disclosure will repay the effort.”

And trying to ensure the disclosures are simple and clear doesn’t solve the problem, the legal scholars argue; it’s difficult to make complex ideas clear, and omitting information in the name of simplicity works against the impulse for full disclosure. 

The Obama administration agrees that mandated disclosures are inadequate. In a report put out last week by the White House outlining the fiduciary issue and the costs of conflicted retirement advice to consumers, the authors cite Ben-Shahar and Schneider’s research when warning against relying on mandated disclosures to solve the problem. “When used to inform savers of the conflicts of interest between them and their advisors, the effects of disclosure by itself are limited and, in many cases, lead to harm and weaker protections.” 

They are too often laden with jargon and extraneous information, and at worst provide legal cover for shady brokers, the authors write. To work, disclosures must be “accessible, accurate and relevant.” But that is a high bar when it comes to complex transactions like IRA rollovers. The disclosures must also carry the weight of educating the public, not just informing them. 

It’s even harder to think about how “accessible, accurate and relevant” might be effectively mandated by the government. As the White House’s whitepaper says, “design challenges remain.” Will the DOL outlaw small fonts and confusing brochure layouts? That seems a stretch, even for progressive liberals.  

Mandating disclosures may sound good politically, but it’s too easy.  

David Armstrong


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