THE BIZOP NEWS

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California Attorney General Edmund G. Brown Jr. today announced a $7.5million settlement with financial-services firm Edward Jones & Co. for the company's failure to inform its customers of its revenue-sharing agreements with various mutual-fund companies.

In these revenue-sharing agreements, Edward Jones obtained payments from mutual fund companies in exchange for promoting their mutual funds to its clients.

"Since we brought suit in 2004, Edward Jones has agreed to change its disclosure policies," Attorney General Brown said.

"That settlement requires Edward Jones to notify each of its customers of any payments it receives from mutual funds that Edward Jones recommends. This will make for better-informed customer decisions."

As this blog constantly tries to point out, it is not an analytic truth that more information means better information means better-informed customers.

In this case, do we believe that the disclosure of a possible conflict of interest is actually going to result in better decision making?

But, in a very interesting article, titled "The Dirt on Coming Clean: The Perverse Effects of Disclosing Conflicts of Interest", Daylain M. Cain, George Lowenstein, and Don A. Moore, have designed an experiment which shows disclosing conflicts of interests can actually make the situation even worse!

Robin Hanson, at Overcoming Bias, describes the experiment on conflict of interest.

"In the first condition, in which the advisers did not disclose their conflict of interest, they knowingly gave misleading advice. In the experiment, the clients lost money because they followed the advisers' suggestions.

In the second condition, the advisers disclosed their conflict of interest: they conceded they would benefit if the clients heeded the advice. But coming clean didn't have the expected result.

Although the clients, now aware that their advisers were biased, were more skeptical about taking the advice, "they didn't discount it enough," said George Loewenstein, a professor of economics and psychology at Carnegie Mellon University and a co-author of the study, which was conducted at the university.

And the advisers, still determined to make more money, exaggerated their claims. "The advisers ended up making even more money than in the first condition, which is exactly the opposite of what you would hope for or expect," he said."

This is an important lab result which bears thinking about.

We need to know exactly how Edward Jones is going to disclose their conflict, whether they will issue exaggerated claims thinking that their clients will automatically discount the information.

It is important for the AG to monitor the written representations made by Edward Jones after this settlement to make sure that they are not more aggressive than prior to the settlement.

Customers should also realize that Edward Jones is disclosing these fees because they are obliged to by law, and not because Edward Jones thinks it is the right thing to do.