Let’s discuss testimonials and endorsements. I used to tell folks “if you’re looking at another adviser’s website, and they post testimonials and endorsements, run in the other direction!”
That is because (for nearly sixty years) the SEC has prohibited the use of testimonials and endorsements.
If an adviser couldn’t play by the rules and was posting endorsements and testimonials, where else might they be cutting corners?
That may all be changing. On November 3rd, with an announcement taking many by surprise, the SEC announced a proposal that, if passed, would allow investment advisers to use endorsements and testimonials. As the SEC release explained, “the proposed amendments to the advertising rule reflect market developments since the rule’s adoption in 1961.”
One of the areas included in the proposal, which has been almost completely off-limits for years, is advertising performance results. It appears this stance may be softening as well. Under the proposal, any strategy would have to post returns over a one year, five year or ten year period.
But the real story about advertising performance records remains true, rule change or not: if all you’ve got to hang your hat on is last years’ performance, you’re already a loser.
Four Prohibitions
The SEC originally adopted the current rule in 1961. The rule attempted to target advertising practices the SEC believed were likely to be misleading.
The Commission imposed four prohibitions:
- Testimonials concerning the investment adviser or its services.
- Direct or indirect references to specific profitable recommendations the investment adviser made in the past (meaning, an adviser could not highlight only the profitable recommendations, that had to post ALL the recommendations).
- Representations that any graph or other device, can by itself be used to determine which securities to buy and sell. Or when to buy and sell them.
- Any statement to the effect that any service will be furnished free of charge, unless such service actually is or will be furnished entirely free and without any condition or obligation. There IS no free lunch. And if an advisor tells you their service is free, or “no cost to you,” start running.
And, more “great” news: The current rule requires investment advisers to keep a record of advertisements sent to 10 or more persons. Under the proposal, investment advisers will be required to make — and keep — records of advertisements distributed to one or more person.
We have been required to keep copies of any letter going out to 10 or more individuals. If you put something on Facebook, it’s likely more than 10 people will see it. That needs to be archived as advertising. With the proposed change, advisers will be required to retain essentially everything. But most advisers already do this. A monthly newsletter or informational letter could be perceived as advertising. So the original letter, along with the list of everyone it was sent to gets archived.
Additionally, tweets are archived, blog posts are archived, all emails (to/from) are archived, Facebook posts, LinkedIn posts are all archived.
Keep in mind this is an SEC proposal, and the SEC oversees registered investment advisor firms. Stockbrokers (I keep forgetting they want to be called “financial advisors” in an effort to blur the distinction), and brokerage firms are overseen by FINRA (the Financial Industry Regulatory Authority).
FINRA will certainly be watching to see how this unfolds for advisers.
Testimonials and endorsements may be easy to come by – just ask a few happy clients to speak into the microphone, or jot a few words down. However, if every firm has a website filled with these platitudes, what is the value of ANY of them?
In my opinion, the biggest hurdle for advisory firms still remains: the firm must commit to spend money on advertising. Which is a tough sell, for many small businesses.
There’s no escaping the fact advertising is expensive – no matter whether your firm is posting ads on LinkedIn, YouTube, Google or Facebook. Or even posting ads like this one (nearby) in the local weekly paper.
Or this ad, running on our local cable provider.
It took several years before we took the leap and decided to plow ahead with our local ads for Mullooly Asset Management. Our strategy is to focus on our own backyard, as we seek to become the investment advisor of choice in Monmouth County. And the ads we have run were a success right from the start. But that takes a capital commitment, which is hard for business owners to make.