The professional titles that financial advisors use really do matter to consumers, according to a new study that demonstrates “financial planners” and “financial advisors” are viewed as significantly more trustworthy than “stockbrokers” and “insurance agents.”
The findings suggest that perhaps the SEC should have gone further in its title reform efforts under Reg BI?
New research from Derek T. Tharp of the Mercatus Center at George Mason University, “Consumer Perceptions of Financial Advisory Titles and Implications for Title Regulation,” examines how consumers perceive commonly employed titles. His findings suggest that titles do influence how consumers form expectations about the service level of investment professionals.
Tharp, an assistant professor of finance at the University of Southern Maine and a researcher at Kitces.com, investigated the premise that a source of confusion for many individual investors is the common usage of the title “financial adviser/advisor” among professionals with significantly different job junctions and obligations to their clients.
This has led to calls for federal and state agencies to regulate the use of industry titles. The Securities and Exchange Commission (SEC) recently abandoned a proposal to prohibit the use of the term “adviser” (spelled adviser or advisor) by representatives of a broker-dealer. The purpose was to distinguish brokers (who do not have a legal obligation to act in the best interests of their clients) from advisers (who are registered with the SEC as investment advisors and held to a fiduciary standard when working with clients).
Had the requirement remained in Reg BI, any reference a broker or insurance agent would have made to the adviser/advisor title would have had to be removed from all business cards, websites and marketing materials.
Although the SEC proposal was not adopted, the idea remains alive and well, and Tharp notes similar proposals may be reintroduced in the future or state governments (looking at you Nevada and New Jersey) may adopt them.
Interestingly, consumers in Tharp’s survey were asked to group investment-related titles with professions in other domains, and they grouped financial advisors/advisers with doctors and lawyers, whereas they grouped brokers with insurance salesmen and car dealers.
As mentioned earlier, these findings seemingly support the regulation of titles. But Tharp says this conclusion should be tempered with the second insight of this study. In the survey, Tharp tested consumer attitudes toward fabricated titles and found that it was relatively easy to introduce new titles that consumers would group with advice-oriented professions.
Consumers frown on “stockbroker,” smile at “financial planner”
Tharp’s survey respondents were asked to score 12 professional titles in terms of their perception of nine characteristics: honest, intelligent, other-serving, trustworthy, helpful, deep, hardworking, successful and caring.
Doctors received the highest scores across all nine dimensions used in this analysis. Lawyers received the second-highest ratings in areas such as intelligence, work ethic, and success, but scored substantially lower in areas such as trustworthiness and honesty.
Car salespeople and politicians were among the lowest rated of all occupational titles assessed in this analysis.
Among the titles commonly used by those in the financial advisory industry, financial planner and financial consultant generally scored the highest, while stockbroker and investment salesperson were among the lower-rated titles.
Consumers selected financial planner and financial adviser as the most qualified to provide retirement advice at rates of 44% and 28%, while just 1% and 3% selected stockbroker or investment salesperson.
The working paper notes that currently proposed rules would allow professionals to use the title of “adviser/advisor” simply by becoming an investment adviser representative (IAR), even if the individual continued to work solely as a broker.
‘Safe Harbor’ as alternative form of title regulation
That titles matter—and that good titles are easy to fabricate—presents a challenge to agencies that wish to regulate by prohibiting the use of certain titles, the working paper says.
A cat-and-mouse enforcement game may result in which firms adopt new and positively perceived titles that are not on the regulators’ blacklist, to which regulators respond by updating their list, only to have firms introduce new titles. The potential for repeatedly shifting terminology may result in even greater consumer confusion.
With a “safe harbor” approach, specific titles could be approved for use by the SEC, state regulators, or both, while new terminology would not be specifically prohibited. The approval should attach the responsibilities and obligations to the consumer for each title.
This policy may prove to be more stable than prohibition of specific titles because titles in the safe harbor would become standard in use and meaning.
Tharp says firms will have little incentive to offer their services under creative titles outside the standard because unusual titles, rather than attracting consumers, would alert them that something is afoot.
In turn, titles with standard use and meaning should provide the clarity that is characteristic of well-functioning markets.
Conclusion
Tharp’s paper concludes by reiterating that advice-oriented titles (e.g., financial adviser, financial planner, investment adviser, investment consultant, and financial counselor) are perceived as different from sales-oriented titles (e.g., stockbroker, life insurance agent, investments salesperson) when evaluated across perceptual dimensions of competence and loyalty.
“This finding points out the potential pitfalls in the sort of reform that the SEC proposed and more recently abandoned,” Tharp says. “While the Nevada proposal may be structured in a manner that captures more of the terminology that consumers may perceive as advice-oriented titles, both the SEC and state regulators may wish to consider how a safe harbor approach could provide the same consumer and firm clarity with less burdensome requirements with respect to regulatory foresight or ongoing requirements to maintain lists of restricted terminology.”
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
