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How Advisors Can Use Client Testimonials Under New SEC Rule

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Pressure to reorganize FA compensation models intensifies. (Photo: Shutterstock)

Advisors can start using client testimonials this year thanks to a recent marketing rule approved by the Securities and Exchange Commission, but they should proceed with caution and make certain they are following the rule’s requirements, according to industry legal experts who spoke during the recent Snappy Kraken webinar “What RIAs Need to Know About the New Marketing Rules.”

The one thing “most advisors are really going to love and take advantage of is the fact that you can actually request a testimonial from a client, get a favorable review and then advertise that review to generate business,” said Max L. Schatzow, an attorney with the law firm of Stark & Stark.

Many consumers, after all, consult such reviews to decide which business to use, he noted, saying: “These things really do matter, and the fact that you’re now able to take advantage of that is huge.”

Potential Trip-Ups

One thing that is a little unclear, however, is the theory of “entanglement and adoption,” he said, noting that if an advisor starts getting involved in the process, it starts to control the content. If you ask all your clients to say nice things on Google Reviews, you run the risk of becoming too closely linked to Google and it becomes “your advertisement,” he said.

Schatzow is hoping there will be more guidance from the SEC on that issue, he said. Until then, it is “probably a little bit too risky for some bigger firms to start actively asking for those kind of reviews from clients,” he said. “But I think you could certainly use testimonials when you ask your client privately” for reviews to be used in a testimonial, he told viewers.

Advisors also need to be cautious if they get a bad review from a client, he said. “Once you get a bad review, you sort of have an obligation to share it or at least highlight it in your advertising campaign” somehow, he warned.

What’s Changed?

Asked what exactly has changed with the new SEC rules, Leila Shaver, a lawyer who is founder of the law firm My RIA Lawyer and legal and compliance partner at Myriad Advisor Solutions, said with a laugh: “Everything.”

“Everyone wants that really happy client to be able to provide” testimonials such as a Google review, a Yelp review or to, in general, “write something down so they can post it on their website,” she said, adding: “You can now do it.”

Client testimonials have “been for the last several decades a fundamental part of growing your business” in any sector, so now “the SEC finally got into the 21st century” to allow RIAs to do it, she said.

“You can have a Google link that you send to your clients, have them post [it] on Google, [and do] the same thing with Yelp or Yahoo or any one of these platforms,” she noted. “If you want to create a place on your website where they can leave reviews  the same thing. Create a link and have them go post it.”

Disclosures Required

There are, however, “a couple of things you’re going to have to consider,” she cautioned advisors.

For one thing, disclosures “have to be everywhere,” she said, explaining: “Who are these people? Are they clients? Prospects? Have they been paid?” If you give somebody a $5 Starbucks gift card or pay them in some way to provide a testimonial, “we have to disclose those things,” she said.

And that information must be disclosed “not just wherever you are having these testimonials or these reviews posted, but also in your ADV  you’ve got to disclose it in Part 1 and Part 2A now,” she told viewers.

Other Rules

Advisors should be aware of the new de minimis compensation amount of $1,000 in any 12-month period, she said. Because of it, advisors “can give out a bunch of Starbucks cards, a bunch of gift certificates [or] little gift or cash prizes, so long as you’re keeping it under that de minimis” amount, she said.

The advertising must also be fair and balanced, she said. Advisors may want to copy the reviews they get  good and bad  and place them on a unique web page where it appears more balanced than the original site where the reviews posted, she told viewers.

Advisors also need to be cautious when including rankings in their testimonials and other ads, she warned. This has not changed much, she said, noting that advisors must be aware of the age of rankings they include because they can’t use outdated ones that no longer apply. Advisors using rankings should also disclose details about them, including an explanation of what the rankings were based on, she said.

It is especially important to be careful when saying if you’re on the Amazon best-seller list because it “can be a little bit misleading,” she warned, saying she knows people who have been on the Amazon best-seller list but sold about six books total. It is imperative to include a disclosure if citing the Amazon list and be careful how long you use your place on the list because it keeps changing, she added.

Gross and net performance must also be shown side by side now if an advisor is including their performance in a testimonial or other ad, and must show one-, five- and 10-year performance or, if they don’t have at least one of those, they must show since-inception performance if showing portfolio performance, she cautioned.

Advisors should also “be very careful about identifying” the clients giving testimonials, she said: They should get their clients’ consent first and ask how they want to be identified. The speakers also cautioned that advisors should consult their firm’s compliance staff or other legal experts when in doubt about a component of the new rule.

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