Conflict of Interest Disclosure With High Quality Advice: The Disclosure Penalty and the Altruistic Signal

Abstract

Advisors often have conflicts of interest: a potential clash between professional responsibilities and self-interests. Disclosure — informing advisees of the conflict — is a common policy response to manage such conflicts. However, extant research on disclosure has often confounded disclosure with poor quality advice. In this paper, we explore whether laws requiring conflict of interest disclosure damage the advisor-advisee relationship more than is intended. Across six experiments (N = 1,766), we examine situations in which advisors give high quality advice but still must disclose a conflict of interest. As predicted, such disclosures yield negative attributions regarding the advisor’s character, even when advice is of high quality (and advisees have full information to judge advice quality), and even when the advisor’s professional responsibility and self-interest are aligned, or the advice runs counter to the advisor’s self-interest. This disclosure penalty decreases trust in honest advisors but can be mitigated if the advisees are explicitly told that their advisor’s conflict of interest arose from external factors beyond the advisor’s control. When advisors’ recommendations run counter to their self-interests, conflict of interest disclosure creates an independent competing effect — the altruistic signal — which increases trust. The net effect on trust depends on which effect — the disclosure penalty or altruistic signal — is stronger. We discuss the implications of these findings for law and policy.

Keywords: conflicts of interest, disclosure, trust, advice, judgment and decision-making

JEL Classification: K1, K10, M1, M38