New SEC Requirements Can Create Opportunities for Advisors

The rules may seem confusing, but there’s an upside if you can navigate them.

Illustration by RIA Intel

Illustration by RIA Intel

After an 18-month window to implement new requirements, last week marked the deadline for RIAs to fully comply with the U.S. Security and Exchange Commission’s marketing and advertising reforms under the Investment Advisors Act. Despite the generous adoption period, many advisors are still worried about whether they’re in compliance and just how these new requirements will affect their businesses.

“Many advisors we speak to have a lot of questions, and there’s a fair amount of anxiety over all the required changes,” says Michael Kim, president of AssetMark, an outsourcing provider for independent financial advisors.

“An Investment Advisor Association survey shows 70% of compliance officers rated the new advertising and marketing rule as their number-one compliance concern,” Kim continues. “That’s higher than things like cybersecurity, ESG, conflict of interest, and other important issues.”

The Marketing Rule, as it’s commonly referred to, is the first update the SEC has made to its stipulations governing investment advisor advertisements and payments to solicitors in more than 60 years. The new rule is designed to “comprehensively and efficiently regulate [an] advisor’s marketing communications,” according to the SEC’s announcement. It’s a modernized rule for a modern era.

The first goal is to create a clear definition of “advertisement,” which the SEC describes as two-pronged:

  • First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors; or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions.
  • Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).

The SEC has also created new requirements regarding the archiving of records, to better reflect communications circulated through all media, especially digital media, which didn’t exist when the old rules went into effect in 1941.
There are other rules and prohibitions built into the new guidelines. As an example, Kim points out an important change around performance measurement.

“Many times, advisors don’t quite understand how performance measurement is calculated and the way that it’s shared with clients,” Kim says. “For example, as it relates to model portfolio performance, certain hypothetical returns are not permitted unless they’re accompanied by the proper level of disclosures.”

AssetMark clients include nearly 8,500 independent advisors with approximately $80 billion in AUM, and currently, a major focus is keeping that base out of trouble with regulators. The firm has spent considerable time preparing for the compliance requirement and helping its advisors get ready for the change — or taking the issue off their plates altogether as an outsourcing partner.

“Advisors, especially do-it-yourself types, are trying to make sense out of the compliance tool and how it impacts the performance on their marketing material. It’s a very tangled web for advisors to work through,” Kim says.

Ultimately, Kim sees a silver lining in the implementation of the SEC marketing rules. He feels that there are aspects of the new rules that can help his advisors grow.

“With this new rule, testimonials and endorsements are permitted, subject to specific guidelines,” Kim says. “That’s a big change from the past, when they basically weren’t allowed. The top source of growth and winning new clients is through referrals — word of mouth. Social media is an important part of how advisors demonstrate their value in the community. With the flexibility of the new SEC marketing rule, testimonials from clients and endorsements from other third parties are now permitted. We believe this can create a substantial number of new opportunities.”

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