Stress levels for many registered investment advisers rose today as the deadline for compliance with the Securities and Exchange Commission’s new marketing rule began. But underlying this apprehension is the potential for advisors to elevate their brands.
The new SEC rule, adopted in December 2020, is the first major review of standards that govern how advisers promote their businesses in six decades and aims to help move the methods into the digital age.
Among other things, the rule eliminates the prohibition on the use of testimonials and endorsements, both paid and unpaid, while strengthening performance promotion standards and other factors. The rule also explicitly allows the use of third-party ratings in ads, as long as the advisors adhere to certain principles.
Advisors have had 18 months from the initial effective date of the rule to prepare. They will now begin scrutinizing the practices, compliance consultants say.
Witnesses used to be a no-no. “[N]How can we and everyone says, ‘Wait, where do I start?'”.FiComm
“The SEC says it will begin targeted examinations after the scheduled date, and I would expect it to begin soon,” said Amy Lynch, president and founder of FrontLine Compliance.
“[T]There is probably some wiggle room here for companies to get their materials and policies in order, but certainly not a lot,” he adds.
But questions remain about whether companies have written policies, updated Form ADVs and systems to track and verify material statements in third-party testimonials.
General Prohibitions Advertisements may not: Source: Wagner Law Group make a false statement of a material fact, or omit a material fact necessary so that the statement made, in light of the circumstances in which it was made, does not induce error; make a material statement of fact that the adviser does not have a reasonable basis to believe it will be able to substantiate upon request by the SEC; include information that could reasonably lead to a false or misleading implication or inference about a material fact relating to the adviser; discuss the potential benefits to clients or investors related to or resulting from the adviser’s services or operating methods without providing a fair and balanced treatment of any material risks or limitations associated with the potential benefits; refer to specific investment advice provided by the adviser, where such investment advice is not presented in a fair and balanced manner; include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or is otherwise materially misleading.
A survey released by compliance consultancy ACA Group in August revealed that 35% of companies said they planned to adopt the new regulatory requirements only when compliance became mandatory.
Then, in September, the SEC notify the sector which would be to take a look at the way companies handle the terms of the rule. This means having written policies and “objective and verifiable means” to review third-party content to protect against inaccuracies or omissions. Companies must also adhere to books and records standards and be able to demonstrate that they are making the required compliance checks.
“I don’t think we’re going to get any more information from the SEC at this point,” Lynch said. “I wouldn’t expect to hear anything for at least six months to a year, depending on what they see from the exams.”
For Jaqi Hummel, director of thought leadership at the ACA Group, the level of anxiety 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 over 400 ongoing discussions.
One concern is how the SEC will allow advisers to use hypothetical performance.
“They could have used Morningstar to build a potential portfolio using the past performance of mutual funds over a period of time and now the use of that information will be very restricted,” he says. “Advisors must first determine 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 advisers who think the rule could boost business but are wary of getting in on it.
“In my experience in marketing for advisors, we’ve always had to be very cautious about using client testimonials because it was a big ‘don’t’ from the SEC’s perspective,” says Carpenter, whose firm of which it acts as a communications consultant for advisors. . “So it’s one of those things where in the industry we used to complain about not being able to use customer testimonials and now we can and everyone was like, ‘Wait, where do I start?'”
Requirements and Prohibitions for Submitting Performance Information Source: Wagner Law Group Gross and Net Performance — Gross performance may not be used in any ad unless the ad also features net performance. Prescribed time periods: Other than private funds, performance results for ads must cover periods of one, five and 10 years (or the life of the portfolio, if shorter). SEC Approval Statements: Advertisements may not include performance results that include any statement, express or implied, that the calculation or presentation of performance results has been approved or reviewed by the SEC. Related Performance: Performance results of one or more related portfolios may be used only if the presentation includes all related portfolios with substantially similar investment policies, objectives and strategies to those offered in the announcement, with limited exceptions if the related performance excluded would not. result in substantially higher performance and does not alter the presentation over the one-, five- and ten-year periods, where applicable. Extracted Performance: Advisors are prohibited from presenting the results of a subset of investments. Hypothetical Performance: It is permitted to present a hypothetical performance (excluding interactive analysis tools and predecessor performance), which has not actually been achieved by any of the Adviser’s portfolios. Predecessor performance: Predecessor performance can only be used in certain circumstances.
Marketing is a priority for most advisers, he noted, and the rule could help.
“The opportunity here is to really meet the consumer where they are and present yourself in a way that they know to help them make a decision about whether or not they want to work with an advisor,” he notes.
Knowing these consumers means advisers need to be intentional about their “digital trust” with potential clients, he said. Advisors should also look to “leverage customer testimonials and third-party ratings to build organic search engine optimization,” he says.
“Search engine algorithms place a very, very high preference on verified user reviews and the quantity of those reviews,” says Carpenter. “So the advisor who decides to start today versus a year from now or two years from now is going to have a huge competitive advantage because they’re going to have more user reviews and that makes a big difference when you’re looking for financial advisors.”
Brian Thorp, founder and CEO of Wealthtender, is looking to capitalize on advisors looking to third-party platforms to help them with marketing. In May of last year, his firm deployed a review platform co-developed with the founder of My RIA Lawyer and Shaver Law Group that is fully compliant with the new SEC advertising rule.
To be certified on the platform, each review must show whether there has been any compensation, any resulting conflicts of interest, and whether the review was written by a client or acquaintance of the advisor. Advisors “in good standing” can display the Certified Advisor Reviews badge on their websites, social media accounts and in their email signatures, the Wealthtender site notes.
While potential clients have historically been able to review advisors’ education and credentials before engaging with them, “online reviews written by clients of advisors and others who know them well create an emotional connection and instill trust based on the experience of others.” Thorp says.
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