That concept you mentioned of having different gear for appearance in LOTRO is a very interesting idea, but I hope they don't implement it in FFXIV. I am a believer that you should be forced to wear what you can afford, it makes up the many struggles that make MMO's so fulfilling. Where's the joy if you can run around decked in shining armor as a level 1, ya know? You're supposed to see those high levels characters and envy their equipment, thats one of the things that kept me playing FFXI; there was always one piece of equipment I had to have.
The way it actually works in Lotro is that you have to have it in your inventory and be able to equip it, in order to use it. Also they had a level 20 requirement before you could start using the set cosmetic display.
They do have a lot of Costume gear you can craft or get from npc's that is level 1 gear with no stats at all. Stuff like miner's backpacks, various style arrow quivers, cloaks, etc. Once you reach level 20 and are able to use cosmetic display, you go buy or craft these pieces, get it into your inventory and then equip it and save it to 1 of 3 sets of gear pages (you have 1 page for actual battle gear, and other pages for custom display). After you set it, you can dump the piece and the image is saved to you (although you need to psychically dye the piece to change its color, so after you dump it you cant change its color again unless you get another one.)
They thought out the system a bit. So you can't have level 1 mules running around with armor that looks like it came from a level 65 dungeon raid. Its more used for fun, stand around town, RPing, and to cover ugly pieces of gear you might be wearing for a while until something better comes up.
I haven't seen this myself, but it is possible... A tank battling in plate, but displaying a wedding dress. So her stats are good and appropriate, but everyone watching sees an angry dwarf female that was just left at the alter taking out frustrations on a troll. That is the downside, although in Lotro players for the most part are mature enough to change display when doing stuff like grouping and raiding, to actually look the part in battle.