The question of whether investment brokers should be subject to a fiduciary standard has sparked a hotly contested debate between Wall Street and the Obama administration. The debate largely concerns conflicts of interest — specifically, whether brokers may be incentivized to surreptitiously push higher-margin products at the expense of an investor's best interests. The White House has found that these conflicts result in a loss of 1 percentage point of return for affected investors, adding up to $17 billion annually. This problem is not limited to investment brokers: earlier this year in American Banker, I argued that small-business loan brokers face similar conflicts.

Disclosures are frequently proposed as a potential remedy to such conflicts of interest. At first blush, disclosure requirements seem both fair and sensible. Armed with complete information, rational customers should be able to fairly evaluate their broker's advice.

Disclosure requirements also have bipartisan appeal because they try to address biases but involve minimal regulation. Some members of the industry also support the idea, which is relatively inexpensive to implement and generally involves less disruption of the status quo.

But disclosure is not a panacea. It can have unintended and even perverse consequences, potentially exacerbating bias among brokers and harming the customers it ostensibly intends to protect.

Consider the results of a 2005 study conducted by a group of economists at Carnegie Mellon University. In the experiment, one group — "estimators" — was tasked with guessing how many coins were in a jar. Another group, "advisors," were allowed to walk up to the jar, study it, and give their best guess to the estimator. Estimators were incentivized to provide accurate estimates, and advisors were rewarded for how high they could convince estimators to guess.

Paradoxically, when advisors disclosed their upwardly biased rewards, the accuracy of estimates went down, not up — the opposite of disclosure's intended effect. Other studies have resulted in a similar outcome, including a 2010 follow-up conducted by the same economists and a seminal study conducted back in 1982.

There are several reasons why disclosures can backfire:

#1: Strategic Exaggeration

Research suggests that advisers such as brokers tend to provide more biased advice to counteract anticipated discounting. Economists have dubbed this tendency "strategic exaggeration." For example, in the studies noted above, because of the disclosure, estimators did indeed discount advice more than when disclosure was not made, but not sufficiently to counteract the increased bias in the advice they received. Everyday experience in other industries reinforces the point. It is fairly common, for example, for car sellers to inflate their asking prices initially in anticipation of the buyer haggling downward.

#2: Moral Licensing

Consciously or otherwise, advisors may feel that biased advice is justifiable because the advisee has been warned. Conversely, according to Russell Investments, agents may feel more obligated to behave better when they have something to hide, and feel less obligated when the other party is made aware of the conflict.

#3: Increased Trust

This "moral licensing" can be especially insidious because disclosures may paradoxically increase consumer trust. When a broker tells a borrower that they have conflicts, the borrower's trust in the broker may actually increase because, after all, the broker is being honest.

#4: "Not Me" Biases

Fourth, even if customers accept that brokers in the abstract may be skewed by conflicts, many are resistant to the idea that their own brokers would be so biased. A 1998 study exploring biases of doctors showed that while many patients acknowledge doctors might be affected by conflicts of interest, few imagine their own doctors would be affected.

#5: Checking the Box

Brokers may also undermine disclosures by casting them as a matter-of-fact compliance hurdle. As leading consumer protection advocate Michael Barr notes, brokers may be tempted to say, "Here's the disclosure form I'm supposed to give you, just sign here." Customers certainly have incentives to thoroughly review documents just as any parties to legally-binding contracts would. But many neglect to do so. Given the information overload that many customers receive, it's easy to understand why.

While coming clean can backfire, the question should not be whether to disclose, but how to ensure that disclosure has its intended effects. Disclosure can only be effective if the recipient comprehends how the conflict has influenced the advisor and is empowered to correct for that biasing influence. We ought to better utilize the following tools.

The first is simply encouraging customers to abide by the caveat emptor principle. Customers should know that when conflicts are disclosed, greater vigilance is warranted. Just as patients may seek out second opinions in order to better assess the effect that conflicts of interest have on their doctor's advice, so can everyday investors, small-business borrowers and others benefit from talking to multiple brokers.

Framing is also critical. A standardized disclosure form with side-by-side comparisons of a broker's products by compensation as well as cost and terms would help de-bias information and empower clients to act optimally. A 2007 study by the Federal Trade Commission found that disclosures that enabled cross-comparisons dramatically increased borrowers' ability to understand mortgage options.

Lastly, we should go beyond disclosures to require that all brokers respect a fiduciary standard. Customers turn to brokers for individualized advice, whether on loans or investment decisions, and trust their broker to help them evaluate options. It is only fair that brokers should have to act in their best interests.

Taken together, these steps can reduce market frictions that result from information failures, put pressure on brokers to be honest in their dealings with applicants, and foster a better-functioning market.

Brayden McCarthy is head of policy and advocacy at Fundera, an online marketplace that connects small businesses with financing, and was previously senior economic policy adviser in the Obama White House and Small Business Administration.Follow him on Twitter @btmccarthy.