Advertising practices that can raise the hackles of regulators
Photos, staff plaudits and hypotheticals are still testimonials by any other name
5 min read- RIAs: Avoid testimonials in advertising, as they are prohibited by SEC rules.
- Regulators view testimonials as misleading due to cherry-picked favorable comments.
- Ensure CCO reviews all marketing materials to maintain compliance and avoid penalties.
I think it was in the first Die Hard movie, or perhaps the twentieth, that Bruce Willis warned the bad guy: “I’m the fly in the ointment, the monkey in the wrench … ” Unfortunately, compliance can throw a monkey wrench into the best marketing strategy.
Maybe I’m a die-hard compliance guy, but there are ways to advertise and market advisory services without crossing the line that will get you into trouble with the SEC or state securities regulators.
In some instances, investment adviser representatives (“IARs”) and marketing gurus are used to working with FINRA rules that apply to registered representatives. They don’t always realize that the rules are different for registered investment advisers (“RIAs.”)
Subject to certain restrictions and disclosure requirements, registered representatives and broker-dealers are permitted to use testimonials in advertisements. For RIAs, however, testimonials are specifically prohibited by Rule 206(4)-1(a)(1) under the Investment Advisers Act of 1940.
Advertisements containing testimonials are viewed as inherently misleading by securities regulators, because they invariably incorporate favorable comments from clients. Even the worst advisers can find a few clients who will say nice things about them, just as the worst films manage to find a few nuggets of critical praise to use in their advertisements.
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Extracting favorable comments
Securities regulators forbid RIAs from using testimonials in advertisements to prevent firms from cherry picking. Suppose an RIA conducts a client survey with the hope of extracting favorable comments to use in advertisements. The RIA cherry picks the best comments and discards the ones that say, “Hiring your firm was the worst decision of my life,” or “I’m in my 90’s and still working, thanks to your bad investment advice.”
Testimonials convey the impression that every client had a positive experience with the adviser. In reality, the adviser may have solicited that endorsement or the client might be one of the few who benefited from the adviser’s advice.
It is not just comments about the adviser’s investment acumen that will be viewed as testimonials. Even comments regarding the friendliness of the staff, or the firm’s attention to customer service, could be viewed as testimonials.
Story Timeline
Explicit or even implicit statements of a client’s experience with an investment adviser are testimonials. Let’s say you post a photo on your website where you’re surrounded by clients who are well-known in the community. Even if you don’t identify the individuals by name, these photos may be an implied testimonial for your firm.
As another example, if your client is the mayor of Quahog or wherever you live, you can’t include his picture in advertisements for your firm without violating the rule prohibiting testimonials.
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About once a week, an IAR comes to me with a plan to circumvent the rule barring testimonials. One marketing brainstorm I see is an attempt to put words in clients’ mouths. The not-so-subtle testimonial goes something like this: Our clients love us; you will too. One adviser even tried to make a statement like this on his website: SEC rules prevent me from telling you how thrilled my clients are with my advice.
Others use hypothetical case studies based on real examples that purportedly demonstrate how the firm saved the day for the client and made the person’s financial dreams a reality. Not surprisingly, every hypothetical case study has a happy ending, thanks to the adviser’s investment strategies.
Lavish video
Since compliance may throw a monkey wrench into your marketing campaign, make certain your chief compliance officer (CCO) signs off on your plans before you go to the expense of producing a lavish video for your website or even a brochure.
It is also a good idea for your CCO, or a designee, to review the invitation and marketing materials you plan to use in conjunction with a marketing seminar. The so-called free lunch seminars used by RIAs and other financial professionals are being monitored closely by securities and insurance regulators.
After facing serious criticism for failing to derail Bernard Madoff’s Ponzi scheme, the SEC is likely to be much more aggressive and thorough during examinations of RIAs. Even routine examinations may turn ugly for investment advisers and might lead to an enforcement action.
Therefore, instead of viewing compliance people as the fly in the ointment or the monkey in the wrench, you might want to think of them as Sergeant Al Powell, the police officer who saves Bruce Willis and his wife at the end of the first Die Hard movie. With compliance covering your back, your marketing campaign won’t die a painful death.
Les Abromovitz is a senior consultant for National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com. Check out NCS’ blog.
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