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Readability of financial advisor disclosures

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  • Lahtinen, Kyre Dane
  • Shipe, Stephan

Abstract

We explore the readability of 30,000 registered investment advisor disclosures and find that these disclosures are written to a college reading level. This finding suggests it will be challenging for the average person to read a typical disclosure, which can lead to misunderstandings regarding conflicts of interest, fee structures, and the advisor’s background. Moreover, there may be agency problems, and uninformed investors may also be deterred from seeking financial advice. The readability of these disclosures has decreased over the past seven years. These results are consistent among four different readability proxies and contradict SEC requirements for “plain English” language in disclosures, specifically for firms providing financial planning services to individuals.

Suggested Citation

  • Lahtinen, Kyre Dane & Shipe, Stephan, 2017. "Readability of financial advisor disclosures," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 36-42.
    • Handle: RePEc:eee:empfin:v:44:y:2017:i:c:p:36-42
    DOI: 10.1016/j.jempfin.2017.08.002
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    References listed on IDEAS

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    1. Mehran, Hamid & Stulz, Rene M., 2007. "The economics of conflicts of interest in financial institutions," Journal of Financial Economics, Elsevier, vol. 85(2), pages 267-296, August.
    2. Tim Loughran & Bill Mcdonald, 2014. "Measuring Readability in Financial Disclosures," Journal of Finance, American Finance Association, vol. 69(4), pages 1643-1671, August.
    3. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, August.
    4. Roman Inderst & Marco Ottaviani, 2009. "Misselling through Agents," American Economic Review, American Economic Association, vol. 99(3), pages 883-908, June.
    5. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
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    Cited by:

    1. Brenner, Lukas & Meyll, Tobias, 2020. "Robo-advisors: A substitute for human financial advice?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    2. Bush, Georgia & Cañón, Carlos, 2025. "Capital flows: The role of investment fund portfolio managers," Journal of International Economics, Elsevier, vol. 154(C).

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    More about this item

    Keywords

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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