Could a list of approved terms be bad for title regulation?

A working paper suggests an alternative approach for 'consumer and firm clarity with less burdensome requirements'

Could a list of approved terms be bad for title regulation?

In recent months, Ontario has declared its commitment to more strictly regulate how the titles like “financial planner” and “financial advisor” are used. While it’s gained broad support for its objective of fostering greater clarity of investors, it comes with some risk of creating excessive burdens, particularly when it comes to defining what titles can actually be used.

But a new working paper from the Mercatus Center of George Mason University in the US, titled Consumer Perceptions of Financial Advisory Titles and Implications for Title Regulation, might represent a way forward.

The study was conducted in light of efforts by the US Securities and Exchange Commission (SEC) to distinguish between broker/dealers and registered investment advisors. A report by noted a Nevada state proposal with a comprehensive list of regulated terms — such as “adviser,” “financial planner,” “financial consultant,” and “retirement consultant” — whose use would limit the degree to which a broker or sales rep is exempted from having a fiduciary duty to the client.

To determine how clients understand different professional titles, the study took data collected from an online survey of 665 adult Americans who were recruited via Amazon’s Mechanical Turk Program in late October last year. Participants were asked to rank 12 occupations such as “financial advisor,” “stockbroker,” “doctor,” “lawyer,” and “used car salesman” based on multiple dimensions including trustworthiness, helpfulness, and honesty.=

The report found a tendency among investors to distinguish between advice-oriented and sales-oriented professions, with advice-givers being ranked more favourably.

“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,” wrote Derek Tharp, assistant professor of finance at the University of Southern Maine and author of the report.

However, it also found that investors tend to conflate different advice-oriented titles, and that such titles are easy to manufacture. “[E]ven the most thoughtful regulation may unintentionally omit some terminology that consumers perceive as similar to the prohibited terminology,” Tharp said.

He suggested the possible emergence of a “cat-and-mouse game,” with regulators constantly pursuing those who use positively perceived terminologies that, while not specifically prohibited, may not actually promote consumer clarity.

As a possible alternative, Tharp proposed the use of a “safe harbour”: federal and state regulators could approve certain terminology for use, but no terminology would be specifically prohibited, though watchdogs would still have the power to determine when unregulated titles used by brokers or advisors are materially misleading.

“[A] model rule issued by the North American Securities Administrators Association and subsequently adopted by the states could provide uniformity among states to further promote consumer clarity,” he said, adding that a safe-harbour approach could provide a good balance between sidestepping an enforcement arms race, providing clarity among firms, and giving room for innovation and consumer choice.


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