Have large financial companies secretly circumvented government regulations designed to safeguard vulnerable investors from bad decision-making?
Most likely, said marketing professor Debanjan Mitra. He and his colleagues discovered that multi-faceted financial companies that employ ‘umbrella branding’ may have been using advertising to indirectly drive customers to all of their product portfolios. Until recently, advertising on behalf of hedge funds was prohibited.
Mitra’s research, titled “Can Brands Circumvent Marketing Regulations? Exploiting Umbrella Branding in Financial Markets” is forthcoming in Marketing Science.
Mitra is a professor of marketing and the Voya Financial Chair at UConn. His co-authors include professors David Musto, of the Wharton School at University of Pennsylvania, Sugata Ray of the University of Alabama, and Yan Lu from the University of Central Florida.
“If one category has restraints, whether they are regulatory or financial, the parent company can ‘fill in’ demand for the brand,” Mitra said. “We found that a parent brand is a vehicle for transferring information from one industry segment to another.”
“What was especially exciting about this research is that it supports what many researchers suspected, but were unable to verify, about how umbrella branding can be used to circumvent restrictions,” Mitra continued.
“This shows the power of marketing. It happens in subtle ways, even to very sophisticated customers like financial investors,” he said. “After all, we’re talking about investment decisions that have a significant impact on a family’s financial well-being. We’re not talking about shampoo.”
Passage of JOBS Act Offered Rare Opportunity
Until seven years ago, certain financial offerings, including hedge funds, were strictly regulated in regard to advertising and promotion. The Securities Act of 1933 imposed a blanket ban on general solicitation, including promotion, adverting, and contacting potential customers, for all securities not registered with the Securities Exchange Commission (SEC). While hedge funds were banned from advertising, mutual funds could advertise because they are SEC-regulated. The professors wanted to know if ‘umbrella branded’ companies could advertise their company in a broader context and reap “spillover” benefits to aid their hedge funds.
Their research opportunity emerged with the enactment of the Jumpstart Our Business Startups Act (JOBS) in 2012, which lifted restrictions on hedge-fund advertising. It provided a natural research experiment, Mitra said. Mitra and his colleagues were able to collect data from asset management companies with hedge funds to see if the JOBS Act led to a dramatic increase in advertising.
“We wanted to determine if hedge funds, faced with a comprehensive marketing ban, benefitted from the advertising by their umbrella brand mutual-fund affiliates and, if so, whether the hedge funds exploited this effect,” Mitra said. “We always thought it was possible that these spillovers occurred, but it was difficult to establish the practice and, in particular, its intent.”
Following their extensive research, Mitra and his colleagues found that hedge funds’ poor circumstances like lower fund inflow or poorer returns is associated with increased advertising by its sibling mutual funds (i.e., those that share a common brand name). More important, they discovered this effect abruptly diminished after the JOBS Act, which allowed hedge funds to advertise on their own. This indicates asset management firms might have exploited umbrella branding to circumvent marketing restrictions on their hedge funds.
These findings will be of interest to policymakers and regulators, who can assess whether such restrictions have unintended consequences, such as giving undue advantage to umbrella brand firms over those that stand alone.
Discovery Has Broader Implications
While the researchers focused on the financial industry, their discoveries also have implications for other businesses. For instance, could a firm use its umbrella branding power to promote a less regulated product (say, baby food) so as to encourage the sale of a more regulated product (say, children’s life insurance)? More broadly, when and how do firms wield this brand power?
The researchers are already exploring these new avenues of corporate advertising research based on their findings.