As consumers, we're flooded with disclosures every day and with what seems like every transaction. They're useful in theory but often fail us in practice -- and people using financial services face some of the worst of it.
Between conflicts of interest among those giving us advice and labyrinthine fee disclosures, it's little wonder that many people shrug their shoulders and give up. But that doesn't mean that you should.
How can you get a handle on disclosures and make the most of them without completely losing your mind?
Thankfully, a recent, and thorough, review of the research can help.
Take account of what you pay attention to
Realize that we are informational magpies. We like to look at things that are pleasant or eye-catching, and we tend to ignore everything else. Our propensity for ignoring bad news is often known as the "ostrich effect." It's not always such a bad thing, as in the case of portfolio management, but other times it's akin to shooting yourself in the foot.
Knowing that you're shying away from something unpleasant (or dull, mind-numbing, or what have you) isn't always easy, but it is necessary. Prime yourself to pay attention to conflicts of interest by thinking of it as one of the key topics for your financial life.
Of course, how information is presented is important. While disclosures are par for the course in finance, they are rarely discussed; instead, you'll often find them buried in small print and on totally eye-crossing ADV forms.
These are, I think we could hazard, pretty inaccessible to most people. But you can bypass them simply by asking a human about them. "What conflicts of interest do you face?" and "What are some of the activities and practices that you need to disclose to me?" are pretty critical questions if you want to ensure that you're getting good advice.
The person on the other side, if he or she wants your business, will answer. And you should listen.
But don't get pressured by wanting to be likeable
Unfortunately, the risk of being told about conflicts in person is that you might feel pressured to reciprocate by showing that you still trust the person's advice. Psychologists call this the insinuation effect -- you might feel reluctant to decline a recommendation you know is conflicted because it could be "interpreted as a signal of distrust."
Another variation is the panhandler effect, where, after a disclosure, you feel as if you should help the person get his or her reward. In the case of an advisor recommending a certain family of mutual funds that pay a higher commission, you might feel that the person is implicitly asking you to help.
How do you avoid these pressures? One would be to channel someone disagreeable, but this can be hard in practice.
Research suggests that being able to make decisions privately or having the option to change your mind later can help reduce pressure. Thus, you might be better off if you can delay decisions -- ask to think about a recommendation before deciding, as it will make it easier to go the non-conflicted route. It also gives you time to think about what you want to do before you act.
Remember that moral license makes it all the more important
Your eyes might have started glazing over by now, but remember this key point before you go back to ignoring disclosure documents: Disclosure can act as a form of moral license, making people feel they have permission to act in ways that aren't aligned with your best interest simply because the conflict has been divulged.
This means that rules that are intended to help you can end up harming you if you're not careful. By taking the time to demand a reporting of conflicts from your advisor or other financial-services provider, you're highlighting this potential problem and will be better poised to eliminate it.
In the end, there's nothing wrong with financial-services companies that want to make money or that have other sources of revenue besides giving good advice, but you should know what it is you're paying for and what unseen costs you could be facing. No one cares about your interests as much as you do, so take care of yourself by being as informed a consumer as possible -- and making decisions accordingly.
Anna Wroblewska has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.