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 Josep Soler-Albertí
EFPA Spain’s Executive Director
FECIF’s Board Director
Access to forecasts and information asymmetry in financial advice
The information asymmetry between suppliers and customers in the investment product markets, as in others, is to blame for its imperfect functioning. The availability of analysis and forecasts for suppliers and not for clients is one important element of the problem. Good advice can alleviate it.
When analyzing the credibility and usefulness of economic and market forecasts, some financial advisers consulted and surveyed by EFPA recently point out the limited access to analysis and forecasts available to investors, unlike to professionals themselves. This is one of the elements that make up the so-called information asymmetry that dominates this and other economic industries and markets, and that leads to the imbalance in the decision-making capacity between supply and demand, in short, to a certain inefficiency of the market. Asymmetric information can derive from specialization and knowledge, which is logical and justifiable, or it can come from a lack of transparency in the market, in which case the consequences tend to be more damaging for those who suffer from misinformation. In investment services, the information asymmetry can become especially acute for both reasons and for an entrenched lack of investment education in individuals and families that aggravates cognitive and emotional biases. They are well studied in economics and behavioral finance, but with little real impact in order to be understood and palliated.
It all started when George Akerlof, 2001 Nobel Prize winner in Economics, published, in 1970, his famous article on "The lemon market", in fact written about the secondhand car market, in which only the sellers know for sure the state of the vehicles. Given the ignorance -and distrust- of the buyers, the sale of cars in good condition became nearly impossible, since the buyer, acknowledging his ignorance due to less or no information, prefers only to pay the price for cars in poor condition, expelling from the market the best secondhand cars. It was stated as an example of a specific market inefficiency that is not identical to other markets, such as investment products and services, but which creates similar problems. Among others, those of adverse selection (erroneous decision making due to lack of information on the demand or, occasionally, on the supply side, as in the case, for example, of a health insured who hides from the insurer his personal circumstances, worse than those declared); moral hazard (decision-making that does not affect whoever makes them, avoiding Nassim Taleb's "skin in the game", which creates asymmetry by transferring risks but not remuneration); or information monopolies (suppliers who have exclusive access to information, whether insider or not). In any of these cases, we could argue that the customers’ non-availability or lack of ability to understand analysis and forecasts could place them in a position of substantial weakness or "information asymmetry".
It seems evident that, with these effects occurring with greater or lesser intensity in investment products and services, the role of financial advice is central in mitigating an information asymmetry exacerbated by the overwhelming dominance of financial illiteracy, or at the contrary in its intensification when the work of professionals is dominated by conflicts of interest.
Fortunately, a series of elements, such as the reputational aim of financial entities, regulation, the requirement of professional qualification and, above all, the submission to ethical codes, such as that of EFPA, favour a majority inclination towards the positive role which, by standing next to the client and their needs and preferences, helping to solve or lessen one of the great investment problems.
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