Most everyone has seen television ads with law firms touting their performance. Clients (or actors?) invariably state what befell them — a car crash or some other harm — then briefly describe their dramatic turn of fortune because they called the law firm. The settlement money they received is almost always highlighted.
RIAs can’t be so brazen.
Their compliance department, if they have one, is constantly hounding them: no testimonials, don’t say anything that can be misconstrued or breaks Rule 206 of the Investment Advisers Act of 1940.
To the delight of some advisors, that might soon change.
In November last year, the Securities and Exchange Commission proposed the first significant revision to the rules governing advertisements and financial advisors since 1979. SEC Chairman Jay Clayton said the rules were antiquated and needed updated. Advertising — its nature and where and how it’s consumed — has changed dramatically over the last 40 years.
The proposed rules, still under consideration, would open up the use of testimonials, endorsements and third-party ratings.
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Specifically, the new changes to Rule 206 would permit advertisements that would enable investment advisors to promote themselves via testimonials and third-party endorsements. It would continue to prohibit making untrue statements or misleading or unsubstantiated claims, presenting specific investment advice that is not presented in a fair and balanced way, and implying any potential benefits that aren’t spelled out.
The SEC Office of Public Affairs in Washington, D.C. declined to comment on the likelihood of the proposed rules being enacted.
Some financial advisors are downright dismayed with some of these proposed SEC revisions.
Kathleen Owens, a financial advisor with Aurora Financial Planning & Investment Management, based in Hilton Head, S.C., is disappointed with some of these planned changes. She says they open up the “floodgates to allow testimonials.”
The SEC, she said, originally discouraged advertising because it has the “tendency to mislead or deceive clients. Why the change of heart now?” In her view, “investment advisors should be held to a higher standard of conduct than other business people. Advisors are professionals, not merchants.”
Yet even Owens believes that some restrictions could be lifted. If a client approved of or “liked” a client’s social media post, that would be considered an endorsement or testimonial and prohibited. That seems extreme and not appropriate for these times, she suggested. Advisors’ not being allowed to list their skills on their LinkedIn profile also seems too confining, she added.
Her overriding fear is that this marketing will quickly get out of hand, and the “SEC and states will not be able to adequately police advertising activity by financial advisors.” And that could lead to a free-for-all for advisors, using testimonials to attract new clients, based on exaggerated claims.
Others are more sanguine. Rusty McGranahan, New York-based General Counsel at Focus Financial Partners, which has 65 clients firms and $200 billion of assets under management, sees the change as positive, as it will help RIAs tell their stories. RIAs could share “case studies, and explain how one RIA helped a business owner diversify his portfolio away from his concentrated industry position, or how an RIA helped a divorced woman manage her portfolio, and a family plan for college for their children through their eventual retirement.”
Despite this enthusiasm for the new proposed rule changes, McGranahan has some concerns “around the definition of advertisement, which is a little broad.” He wonders if any communication between RIAs and their clients must be reviewed, even if it’s not an advertisement.
He also thinks that the new rules will give an edge to larger firms like Focus Financial, a serial acquirer of RIAs and one of the few advisories that have gone public. It has a chief marketing officer that helps all of its partner firms and individual marketing officers at those firms to take advantage of these new rules.
Nor is McGranahan overly concerned that some firms will make exaggerated claims and get away with them. Most clients are high-net worth individuals and “if there is some puffery in over-the-top advertisements, most clients will shy away from that,” he offers.
As General Counsel overseeing legal issues, McGranahan is most focused on “making judgment calls in the initial phases about what fair and balanced means until we get to a level of best practices,” he says.
Bottom-line, if Rule 206 is adapted, expect to see more “case studies, which bring to light, the fiduciary standards of RIAs and how it’s intertwined in the lives of their clients,” he says.
Matt Reiner, an Atlanta-based partner at Capital Investment Advisors, which manages $2.8 billion, said most potential clients rely on recommendations from a peer or friend when choosing a financial advisor.
“Testimonials will allow for individuals to get another piece of information on the firm to help them determine whether a financial advisor is appropriate,” he said. These endorsements enable future clients to see “what type of people are the advisor’s clients and what those experiences would be,” he added.
Clients can glean a better feel for each firm, Reiner suggested, to determine whether they cater to ultra-high-net-worth families or the “millionaire next door” that his firm attracts.
In a digitally connected world, this alternation fits into how most clients research whether to hire a specific firm, Reiner said.
Advisors spend a considerable amount of time adhering to compliance rules, which will be eased if the statute is updated. The marketing material must endure a deep due diligence process to ascertain what is acceptable and what isn’t. “It’s all rather vague,” Reiner noted. “The hope is the rules will be more definite as to what’s advertising and what’s not.”
He acknowledges that some advisors will try to “take advantage of the rules and take testimonials too far.” If they do, “it could be another black eye on the industry. But I don’t think that should keep us away from advancing these rules. We’re in a digital world and we have to evolve,” he said.
Zulay Labra, chief compliance officer at Miami-based GenTrust, an RIA that manages $2.1 billion, also thinks that opening up advertising for RIAs will “level the advertising playing field with broker-dealers, who are allowed the use of testimonials as part of their marketing strategy,” she noted.
Despite her enthusiasm for the revising of rules, as a compliance officer, it would mean that she’d have to “approve every single advertisement sent out to the client.” Since GenTrust is a medium-sized firm with about 30 employees that relies on external attorneys and consultants, it’s not clear, as of now, whether it could leverage these relationships to help with its marketing, she suggested.
If the SEC authorizes testimonials for RIAs, Labra expects that the review process for issuing advertisements would take longer than before. She also envisions that investment advisors would step up their use of social media, particularly on LinkedIn, which until now, has been extremely limited because of the rules.
Labra expects that the SEC will authorize these rules changes. “The rules are so outdated,” she explained. The result will be that investment advisors will take a more active role on social media who previously were on the sidelines.
Reiner predicts that if the SEC updates this rule, financial advertising will change. “Testimonials will be on the top of the page of a firm’s website; it creates a more personalized element” than the vaguer financial statements currently in place.
Ultimately financial advertising will consist of more human stories, Reiner expects. “Instead of saying ‘trust us, we know what we’re doing,’ we’ll market through clients who believe in us.”