Legislation on disclosure and transparency: Will increased information availability cause analysis paralysis or better decisions?

Contributor: Robert McAloon

The U.S. Centers for Disease Control and Prevention reported some less-than-desirable statistics several years ago[i], highlighting health and obesity levels in Americans across the country. In response, many governmental and regulatory bodies moved in to examine how to help people fight obesity and change the statistics.

In particular, one state responded by requiring restaurants to disclose fully what patrons were buying. In a rather contentious decision, a federal judge ruled that reasonable people would make better decisions based on calorie information provided, potentially leading to a decline in the number of obese people[ii]. Unfortunately, that law did not work out as well as hoped.  Recent studies found that some people still made bad decisions, while others made some better decisions[iii] based on the information provided.

Regarding financial services disclosure and transparency, the situation may be similar. For Americans who already have good financial habits — low debt, solid portfolio management, good diversification — the increased information and transparency proposed by current legislation should facilitate easier methods to gather data and make decisions. However, the majority of the population may end up suffering from analysis paralysis because of the increased information, instead of making better decisions.

For the American consumer to understand fully what they purchase and how it will behave requires more than a display of asset-related data; it requires supporting processes and initiatives.  Legislative initiatives cannot accomplish this feat on their own, and increased information alone does not guarantee a transparency initiative’s success either. And any transparency initiative must be surrounded by a larger program that includes education, and educated decision making.

How American-based advisory firms will move forward under the new transparency legislation is open for debate. Some may make being a “fully disclosed,” compliant organization a value proposition. Mere compliance, however, does not imply better decision making. Some firms may start offering comprehensive educational services to drive sales and adoption rates for their services, but that brings into question how the programs are to be funded.  Highly comprehensive programs may cause firms to increase their fees or advisory services rates, requiring even greater disclosure.

As legislators consider sweeping changes to disclosure and transparency regulations, what challenges, benefits or opportunities do you see arising for your firm?

[i] http://www.cdc.gov/obesity/data/trends.html

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