A research paper into conflicts of interest has been published on the Royal Commission into financial services’ website.
The Royal Commission asked Professor Sunita Sah to respond to a number of questions about how conflicts can influence advisers, the effects of disclosure of a conflict on both advisers and advisees, and what other policy measures there are.
Brokers facing conflict of interest was a topic which caused concern for Commissioner Kenneth Hayne during the proceedings, particularly in terms of whether vertical integration was creating a bias.
Sah points to various studies throughout her report, including one which revealed financial advisers were likely to give advice that benefited their own self-interests rather than the interests of their clients.
“Many other studies” also showed conflicted advisers gave “significantly” more advice than unconflicted advisers.
Looking at how financial advisers can be influenced by conflicts of interest, Sah’s first statement said often the conflicted adviser is unaware of the influence.
How and why advisers offer biased advice is put down to many contextual factors, including industry norms, displacing responsibility and moral disengagement.
Going into detail, Sah said advisers are more likely to provide biased advice if they give advice to multiple recipients, because this increases the psychological distance between them and the clients.
Also, advisers may justify their actions if they see others doing the same, or they blame the harm caused on the client for making that decision.
While most brokers argue they are doing the right thing by their customers, despite of any perceived conflicts of interest, Sah said there are psychological factors and misbeliefs.
She said succumbing to a conflict of interest was not necessarily corruption, because “in reality, many conflicts of interest that influence advisers occur on a subconscious and unintentional level”.
She added, “Financial advisers’ conflicts of interest are not merely problems for the intentionally corrupt… but also for well-meaning professionals who succumb to unintentional bias.”
The report also looked further at how advisers can rationalise their bias. Sah said, “It is relatively easy for advisers to, for example, persuade themselves that the products that they receive commissions for really are the best and the clients they recommend investments for really will benefit from those investments.”
Discussing what effect disclosing the conflict of interest would have, Sah said there are both advantages and disadvantages.
While it would give clients the opportunity to consider the advice knowing the conflict and would possible decrease the level of bias, Sah said it can put increased pressure on them to comply with the advice.
Solutions to overcoming conflicts of interest were suggested in the paper. These included various ways to present the disclosure of a conflict, the offer of a ‘cooling-down period’ so the client can change their mind and policy responses.
Policy responses considered in the report included sanctions or penalties, structural changes and changes to organisational rules, where goal setting and corporate culture play a role in encouraging bias.