The Mercatus Center of George Mason University in Arlington, Va., released a working paper Tuesday entitled “Consumer Perceptions of Financial Advisory Titles and Implications for Title Regulation” that examines how consumers understand terms like “broker” and “adviser.”
The report, authored by Derek T. Tharp, recommends that regulators take a new tack in the effort to limit what titles people in investment advisory roles can utilize: the creation of “safe harbor” language—terms that are approved for describing advisory work in the absence of any proscribed terminology.
Tharp said that this “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.”
Earlier drafts of the SEC rule would have prohibited representatives of a broker/dealer from using the term “adviser” as a means to distinguishing these players, who don’t have to abide by the fiduciary standard, from registered investment advisers, who do. But the final rule did not include that restriction.
Some states are taking title regulation into their own hands.
For example, a Nevada state proposal, a more comprehensive list of terms would be regulated—such as adviser, financial planner, financial consultant, retirement consultant, retirement planner, wealth manager and counselor—and use of these terms by a broker or sales rep would limit their exemption from the fiduciary duty. Also, any misleading terms could be prohibited in the future.
But Mercatus' Tharp said that there are so many terms out there that connote financial “advice” that it is a waste of time to try to keep up with every single one. Even then, he said, banning some terms may not improve clarity for many consumers, who tend to associate a variety of terms with financial advice.
The study used data collected from an online survey of 665 adult Americans recruited via Amazon’s Mechanical Turk program on Oct. 29 and 30, 2018. The respondents were paid $1, and the study took 10 to 15 minutes to complete.
It asked the respondents to assign a ranking to 12 occupations, including doctor, lawyer, politician, used car salesman, financial adviser and stockbroker, according to principles such as trustworthiness, helpfulness and honesty.
The report found that investors tend to discern between advice-oriented professions and sales-oriented professions, ranking the former more favorably, but also that advice-oriented titles, like financial planner and adviser, tend to get lumped together in the public’s imagination and are easy to fabricate.
In essence, the study found that occupational titles commonly used by financial professionals other than “financial adviser” were also found to cluster with advice-oriented professions; the results suggest that even if brokers were prohibited from using the title “adviser,” they could employ similar titles, like “financial planner,” which are perceived by consumers to be similar to advisers and are even more highly respected titles than “adviser.”
The ability of brokers to adopt alternative terminology highlights the problem that even the most thoughtful regulation may unintentionally omit terminology that some consumers perceive as similar to the prohibited terminology.
Nevada’s proposed regulation could overcome this; it allows regulators to continue to add to the list of proscribed titles in the future.
Another challenge for regulators could be how to regulate people who are dually registered as brokers and advisers, as the SEC’s rule allowed dual registrants to describe themselves as “advisers.”
In comparison with the SEC’s abandoned proposal, the Nevada regulation does a better job of capturing terms that are likely to be perceived as advice-oriented titles, Tharp said, but he noted that it could lead to an endless “cat and mouse game” whereby the state regulator continues to pursue industry participants who are seeking the most positively viewed descriptors that are not specifically prohibited, but this may not actually promote clarity in terms.
Barbara Roper, director of investor protection for the Consumer Federation of America, wrote in an email that "I think the analysis is sound, including with regard to the challenges posed by title-based regulation. Nevada’s approach of continually updating its list of prohibited titles is probably the best option, though it could be combined with the kind of safe harbor approach advocated here to good effect."
