Susan Thorp is Professor of Finance at the University of Sydney and a member of the Research Committee of the OECD International Network on Financial Education.
A financially competent consumer needs to be able to tell the difference between a well-qualified financial professional and an unqualified charlatan. In everyday life, we all rely on professional qualifications and licenses to guide our choices of expert help. We depend on registers, professional colleges and licencing boards to give us current and correct information about the skills and character of professionals and tradespeople. We are more likely to avoid the frauds and fakes if we have a working knowledge of proper professional standards, or at least know where to look to find out what they are.
A recent study in Australia of consumer decisions about financial advice highlights how important this part of financial competence really is. Motivated by earlier work that showed that clients are not very good judges of the quality of advisers, my co-authors and I conducted experiments that evaluate how people choose between financial advisers over time. In an online video experiment, over 1,000 Australian participants viewed financial advice presented by our carefully selected actors playing financial advisers. Participants saw two different “financial advisers”, one giving good advice and one giving bad advice, on four topics, some easy and some difficult to understand. As part of the design, one adviser showed a (genuine) professional qualification, and the other did not. We varied which adviser displayed the qualification independently of the other aspects of the design, and so that we could identify and measure the impact of professional qualifications on “client” choices and trust.
Participants more often chose advisers who showed a professional qualification, and trusted them more readily, than advisers who did not. What’s more, financial knowledge did not affect this outcome: participants who were financially knowledgeable and experienced in financial decisions responded to professional qualifications in much the same way as less competent participants. Our results emphasise that consumers will use qualifications to guide their choices, and the credentials a professional hangs on their office wall can tilt a consumer’s decision in their favour.
While this effect – as it relates to a valid professional qualification – can be reassuring, we found a more disturbing problem. Many people cannot detect a fake qualification.
To ensure that our experiment was sound, we ran a pre-test to ask people what they thought were “good” professional credentials. Subjects in the pre-test were asked to consider several financial adviser qualifications, some of which were real and some were fake. They were then asked to pick the qualification that they thought was “most” likely to be associated with good advice and the one “most” likely to be related to bad advice.
Participants recognised that the high quality genuine credential (Certified Financial Planner) was most likely to be related to good advice and least likely to be related to bad advice. But alarmingly, the next two most popular credentials (“Master Financial Planner” and “Qualified Financial Planner with High Designation”) were fake. In other words, everyday people find it hard to choose between fake and real adviser credentials, especially when they sound similar.
What does this imply for financial competence and financial education? An international survey by the OECD/INFE reports that fewer than 20% of respondents who had purchased a new financial product in the two years before the survey had turned to independent information, including advisers. The report recommends that more could be done to “guide consumers towards unbiased sources of information”. This includes showing consumers how to identify well-qualified financial professionals. Similarly, the G20/OECD High-level Principles on Financial Consumer Protection state that “appropriate mechanisms should be developed to help existing and future consumers develop the knowledge, skills and confidence to […] know where to go for assistance”.
Professional adviser associations and consumer financial protection regulators can help consumers know where to go for help and to set, preserve and maintain certification standards. They can provide a central information service for consumers to test and compare qualifications and training. In Australia, the Australian Securities and Investments Commission offers advice and an adviser registry search, even though it does not distinguish between different professional designations. In the United States, FINRA has a website where clients can read the requirements for adviser professional designations, learn if the designation meets state certification standards, and locate where to confirm an adviser’s professional status.