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Welcome to the World of Online Financial Advisor Reviews

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The U.S. Securities and Exchange Commission recently unleashed financial professionals from its old-fashioned social media restrictions in a move that stands to be extremely beneficial for advisors’ and investors’ wallets — considering the state of financial literacy in this country and the roughly 229,000 people who are currently employed as financial planners, according to the U.S. Bureau of Labor Statistics.

It took the financial industry a long time to make sense of social media. In 2013 — nine years after Yelp was founded and Mark Zuckerberg started Facebook — the SEC officially gave publicly traded companies permission to disseminate company information via social media.  That was progress. 

The real change came in last March when the SEC updated its guidance regarding the way in which financial advisors interact with customer reviews.  For the longest time, they were barred from getting anywhere close to reviews – whether that meant encouraging customers to rate their services or featuring reviews in advertising materials.  Then came this:

“We understand that use of social media has increased the demand by consumers for independent, third-party commentary or review of any manner of service providers, including investment advisers,” the SEC wrote in announcing its updated guidance.  “We recognize that social media has facilitated consumers’ ability to research and conduct their own due diligence on current or prospective service providers.”

Financial advisors can now interact with reviews as much as they want, as long as they don’t pick and choose which ones to feature.  That’s an extremely important development on a number of levels.

For starters, financial advisory is undergoing significant growth, according to the Bureau of Labor Statistics – with the number of such jobs projected to increase by 32% from 2010 to 2020, ultimately surpassing 273,000. 

The cream of this crop stands to benefit a great deal, if the proven benefits of reviews in other professions are any indication.  For instance, an increase of one star to a restaurant’s average Yelp rating equates to a 5% – 9% revenue boost, according to a study from Harvard Business School.  Another study, this one from the University of California, Berkeley, found that a half-star Yelp rating increase makes it up to 49% more likely that a restaurant will sell out its evening seating.

“Overall, it should provide more information to consumers and perhaps make them more interested in engaging a financial advisor,” says John R. Birge, professor at the University of Chicago Booth School of Business.  “It would, however, probably also increase competition among financial advisors.  So, there is both potential upside and downside for financial advisors.”  Nevertheless, increased competition and more readily available information about financial advisors both stand to benefit the country’s consumers a great deal.  Financial literacy levels here are low, exemplified by the fact that only 40% of people have emergency funds, only 20% have budgets, and we’re expected to collectively incur more than $60 billion in credit card debt this year.

Furthermore, anyone could fall victim to a shady financial advisor without the proper information.  For example, an NFL agent and his financial advisor partner were recently arrested by the FBI for an alleged scheme to defraud investors in a string of Burger King franchises. Who knows, had reviews been embraced earlier, would his victims have noticed something in his background that would have kept them from trusting him with their money? 

Besides, when it comes to money management, information is power.  No matter who you are or how well-versed in the art of personal finance you happen to be, you’d be a fool not to want as much information as possible about the professionals from whom you seek guidance. 

“Individuals will still, however, need to recognize that past success, even if documented in social media, is not a guarantee for the future,” Birge says.

In other words, we should be pleased about financial advisors joining the world of social media, but we should also avoid over-relying on reviews.  Reviews are helpful.  They are not, however, gospel.