What Financial Advisors Should Know About SEC Rules Allowing Testimonials

Prospective clients often search for testimonials and reviews of financial advisors on Facebook, Yelp or other social media sites. Often, their searches come up short.

a person sitting at a table using a laptop computer: Female financial executive talking on smart phone.

© (Getty Images)
Female financial executive talking on smart phone.

That’s because advisors, unlike other service providers such as attorneys and insurance agents, have been prohibited from using testimonials in their advertising.


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But that is changing.

In December 2020, the Securities and Exchange Commission announced it was updating decades-old rules about investment advisor marketing.

The ruling now allows endorsements and testimonials, with some restrictions. Advertisements must prominently and clearly disclose whether the person giving the endorsement or testimonial has been compensated and whether he or she is a client.

The updated regulation also permits performance reports and third-party ratings. These are also subject to strict parameters.

Many advisors have a positive response to the changes.

“A lot has happened in the world of communications and advertising since the prior rules were adopted in 1961 and 1979, so it is appropriate to modernize the guidelines to recognize new technologies and tactics,” says Craig Jonas, founder and CEO of CoPeace, a company specializing in impact investing in Highlands Ranch, Colorado.

Jonas notes the ruling may provide better information and transparency for consumers. It’s still important to do due diligence and research advisors, however, even those with five-star ratings.

Entering the Modern Age

Brian Haney, co-founder and vice president of the Haney Group, an advisory firm in Silver Spring, Maryland, applauds the SEC’s action. He notes that many advisors have complaints about archaic practices that are mandated by regulation, and the change is “long overdue.”

“The challenge will be in ensuring your materials only include what is allowed and don’t come close to the line,” he says.

The revised regulations could be a boon for advisors hoping to attract younger clients. Christy Aleckson, founder and CEO of Single Point Financial Advisors in Beaverton, Oregon, works with millennials. “Many of them prefer to know others’ experiences before they jump in,” she says.

She points out that the generation tends to search for reviews before making a buying decision. “They will Google, ask peers or check Yelp before reaching out. For that demographic, this may be a positive change to getting them engaged,” she says.

Road Map for Advisors

Compliance experts and attorneys underscore the need for advisors to proceed with caution.

Ricardo Davidovich, a partner in the investment management and private equity practice groups at the law firm Haynes and Boone in New York, says the new regulation has pros and cons for advisors. Some of the rules are quite detailed, which could be challenging for those who aren’t careful.

“For example, the requirement that performance advertising must show net performance,” Davidovich says. “Gross performance can be used, but net performance must be included with equal prominence.”

He adds that the amendments codify guidance the SEC previously issued governing the use of investment performance generated by a firm’s personnel while working at other firms.

“The advantage of codifying previous guidance is that it puts everything in one place and gives advisors a road map as to what they can and cannot do,” Davidovich says,

Stacy Sizemore, chief compliance officer of tru Independence, a Portland, Oregon, firm that provides business services for advisors, says the implementation of the new rule will initially likely be difficult for advisors.

“There will be much to consider in writing new policies and the training of advisors on what is permitted and what is not,” she says. “The heavy lift will be for compliance: reviewing the risk involved, writing new policy, reviewing disclosures and training our people on what is involved.”

She adds that one of the biggest challenges will be to temper advisors’ excitement while allowing compliance officers to review potential risks.

“One of my biggest concerns is that my advisors will want to use testimonials on day one, yet I will not be comfortable until I see how other firms are reacting and implementing the new rule,” Sizemore says.

Watch the Disclosures

Leila Shaver, securities attorney and founder of My RIA Lawyer in Atlanta, says advisors will have to keep in mind the regulatory requirements for testimonials, which prospective clients often view.

She points to the requirement to include disclosures with the testimonials, versus in a separate location, and that testimonials must be accurately expressed. “Unless it’s an internet troll, negative testimonials will have to be tolerated,” she says.

Shaver adds that the new rule comes with seven prohibitions, including a prohibition on any statements the advisor cannot substantiate. For example, if an advertisement states that an advisor is an expert in financial planning, he or she must be able to substantiate that statement.

“If you use testimonials in your advertising, you may need to include a disclosure that the featured testimonial is not representative and also provide a link to a representative sample or a complete list of testimonials about the advisor,” Shaver says.

Max Schatzow, an investment management and securities attorney at Stark & Stark in Princeton, New Jersey, says it will take some time for industry norms to develop around the new rule.

“There is a bit of subjectivity in the new rules, and with no precedent, advisors will need to make calculated business decisions on how aggressive they want to push the boundaries,” he says. “For example, if you received a glowing testimonial and want to advertise it, how do you present it in a way that doesn’t violate the general prohibition against misleading implications or inferences?”

Schatzow believes that once firms have time to adapt, compliance will become easier.

“Instead of having to know and be able to locate countless no-action letters, guidance updates and risk alerts, a compliance professional should be able to look within the four corners of the rule and make an informed decision on the risk of any specific advertisement,” he says.

Facing New Marketing Decisions

In addition to complying with legalities, advisors must determine how to incorporate the new rule in their marketing.

April Rudin, founder and president of The Rudin Group in Fort Lee, New Jersey, says many advisors don’t know their own value proposition, or their current marketing materials fail to convey the right message to their target clients.

Rudin, whose firm specializes in digital marketing for advisors, recommends that firms think hard about their messaging before diving into a new ad campaign. She says not all of the new guidelines may be a fit for every firm.

While she believes the spirit of the new regulation is correct, she says it remains to be seen whether advisors can implement effective ads and investors can write useful testimonials.

“Personally, I unders
tand the usefulness of peer ratings for restaurants and hairstylists,” she says. “But I am not sure how this will play out for endorsements of more personal relationships and the greater emotional role that advisors can play in their clients’ lives.”

Copyright 2021 U.S. News & World Report

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