Stress levels for many registered investment advisors notched up today as the compliance deadline for the Securities and Exchange Commission’s new marketing rule kicked in. But underlying that apprehension is the potential for advisors to elevate their brands.
The SEC's new rule, adopted in December 2020, marks the first major overhaul of standards governing how advisors promote their businesses in six decades and aims to help move methods into the digital age.
Among other things, the rule eliminates prohibition of the use of testimonials and endorsements — both paid and unpaid — while tightening standards on promoting performance and other factors. The rule also explicitly allows the use of third-party ratings in advertisements, provided advisors adhere to certain principles.
Advisors have had 18 months since the rule's initial effective date to prepare. Now they will start scrutinizing practices, compliance consultants say.
“The SEC says it will start targeted exams once the target date is past and I would expect that to start soon,” said Amy Lynch, president and founder of FrontLine Compliance.
“[T]here is probably a little leeway as to firms being able to get their materials and policies in order, but certainly not much,” she adds.
But questions remain about whether firms have the written policies, Form ADV updates, and systems to track and vet material statements in third-party testimonials.
A survey released by compliance consultancy ACA Group in August revealed that 35% of firms said they planned to adopt the new rule requirements only when compliance became mandatory.
Then, in September, the SEC put the industry on notice that it would be taking a hard look at how firms handle the rule’s terms. That means having written polices and “objective and testable means” for reviewing third-party content to guard against misstatements or omissions. Firms also need to adhere to books-and-records standards and be able to show they are doing the required compliance checks.
“I think at this point we are not going to get any more information from the SEC,” said Lynch. “I would not expect to hear anything for at least another six months to a year depending on what they see from examinations.”
For Jaqi Hummel, director of thought leadership at ACA Group, the anxiety level is evident from an online chat group. The National Society of Compliance Professionals has an online forum called the Marketing Rule Working Group, which has 381 members and more than 400 ongoing discussions.
One concern is over how the SEC will allow advisors to use hypothetical performance.
“They might have used Morningstar to create a potential portfolio using the past performance of mutual funds over a period of time and now the use of that information is going to be heavily restricted,” she says. “Advisors have to determine first whether the client receiving the information has the ability to analyze the information,” as well as the expertise to understand the risks and limitations of the information.
Megan Carpenter, CEO and co-founder of FiComm, also hears general uncertainty from advisors who think the rule could boost business but are wary of jumping in.
“In my experience in marketing for advisors we have always had to be really cautious around the use of client testimonials because it was a big ‘no can do’ from the SEC’s perspective,” says Carpenter, whose firm acts as a communications consultant for advisors. “So it is sort of one of those things where we in the industry used to complain about not being able to use client testimonials and now we can and everyone is like, ‘Wait, where do I start?’”
“The opportunity here is really to meet the consumer where they are at and show up in a way that they are familiar with to help them make the decision as to whether or not they want to work with an advisor,” she notes.
Meeting those consumers means that advisors have to be intentional about their “digital trust building” with prospects, she said. Advisors also should look to “leverage client testimonials and third-party ratings to build organic search engine optimization,” she says.
“The search engine algorithms give very, very high preference to verified user reviews and the quantity of those user reviews,” Carpenter says. “So the advisor who decides to start today versus a year from today or two years from today is going to have a huge competitive advantage because they are going to have more user reviews and that makes a big difference when you search financial advisors.”
Brian Thorp, founder and CEO of Wealthtender, looks to capitalize on advisors seeking out third-party platforms to help them with marketing. In May last year, his firm rolled out a review platform developed in conjunction with the founder of My RIA Lawyer and Shaver Law Group that’s fully compliant with the SEC’s new advertising rule.
To earn certification on the platform, each review has to display whether there was any compensation provided, any conflicts of interest arising from it, and whether the review was written by a customer or an acquaintance of the advisor. Advisors “in good standing” can then display the Certified Advisor Reviews badge on their websites, social media accounts and in their email signatures, Wealthtender’s site notes.
While potential customers have historically been able to review the education and credentials of advisors before engaging with them, “online reviews written by clients of advisors and other people who know them well create an emotional connection and instill confidence based on the experience of others,” Thorp says.