Photos, staff plaudits and hypotheticals are still testimonials by any other name

November 19, 2009 — 4:05 PM UTC by Les Abromovitz

8 Comments

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.

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.

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.

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.


Mentioned in this article:

NCS Regulatory Compliance
Consulting Firm
Top Executive: Mark Alcaide, COO/Partner



Share your thoughts and opinions with the author or other readers.

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TJ Gilsenan said:

November 19, 2009 — 4:23 PM UTC

Les – great column as always. I’d like to get your take on testimonials (or bad reviews for that matter) on websites outside the control of a financial advisor. Specifically I am referring to personal blogs, local search engines (like yelp.com) and even google maps listings. As an example this is a google maps page for Black Rock:

http://maps.google.com/maps?source=ig&hl=en&rlz=1G1GGLQ_ENUS305&=&q=financial%20planner%20nyc&um=1&ie=UTF-8&sa=N&tab=wl

As you can see, there is nothing stopping someone from writing a review visible to all who search for Black Rock. The page belongs to Google and Black Rock has no ability to edit the posts. The same applies to people’s blogs, facebook pages, twitter accounts, etc. In short, the web is turning opinions usually shared on the golf course in to public documents.

What happens when the examiners see that someone has write an unsolicited testimonial for ABC Wealth Management and posted it to their personal Facebook page?

[ note: this comment re-submitted by RIABiz Webmaster upon re-publishing of Les’s column ]

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Bill Winterberg said:

November 19, 2009 — 4:37 PM UTC

@TJ Gilsenan
Fortunately, the IAA of 1940 is very clear regarding the scope of the testimonial prohibition. Rule 206(4)-1(a)(1) says it’s illegal for registered advisers “to publish, circulate, or distribute any advertisement” that refers to any kind of testimonial.

I am not an attorney, but I interpret this to govern all references to testimonials for which the adviser has control or influence.

A testimonial posted at a 3rd party review site (e.g. Angie’s List, Google Maps, Google Sidewiki) that is beyond the control or influence of an adviser would not, in my opinion, violate the rule.

However, if an adviser posts a link on the firm’s website to direct clients and prospects to the review website, I believe it violates the rule. Linking to the review may constitute circulation of the testimonial. The link to the review must be removed from the firm’s website in order to remain compliant with the Act.

Bill @ <a href="http://fppad.com">FPPad.com</a>

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Jan Sackley said:

November 19, 2009 — 5:16 PM UTC

Excellent article and a great reminder for those preparing material for their RIA.

Jan Sackley
Fiduciary Foresight
Risk and Regulatory Compliance Consultants
jan@fiduciaryforesight.com
Twitter@jansackley

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Les Abromovitz said:

November 19, 2009 — 6:22 PM UTC

I appreciate all of your kind words about my column. I agree completely with Bill’s interpretation of the rule prohibiting testimonials. As Bill suggested, I expect that securities regulators will look at whether the adviser had control or influence over the publication, circulation or distribution of the testimonial. I also believe they will question whether the testimonial was truly unsolicited by the RIA. An SEC or state examiner might probe to determine if the adviser encouraged a friend or relative to post the favorable comment.

Les Abromovitz, National Compliance Services

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John Cook said:

September 23, 2010 — 1:01 PM UTC

I am a reg. rep. and RIA for a small firm. I market only one product and that is a Hedge Fund, (seperate from my firm and unaffiliated) that I initially invested in back in 1994. Naturally, I have years of history and personal experience as an investor with the fund and I am a close friend of the manager. Those experiences are the reason I am currently marketing the fund today and I certainly share those experiences with potential investors. Does this situation pose any compliance issues, strictly regarding testimonials, that I should be aware of?

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Les Abromovitz said:

September 24, 2010 — 2:37 PM UTC

Unfortunately, this approach seems to raise a number of compliance issues. A lot depends upon the types of marketing materials you are sending, including e-mails to various prospects. You may be engaging in performance advertising, which opens a can of worms.

You also need to document your due diligence in selecting this hedge fund from among other investments. As the IAR for an RIA, you must satisfy your fiduciary obligations to clients and prospective clients.

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Les Abromovitz said:

September 24, 2010 — 2:37 PM UTC

Unfortunately, this approach seems to raise a number of compliance issues. A lot depends upon the types of marketing materials you are sending, including e-mails to various prospects. You may be engaging in performance advertising, which opens a can of worms.

You also need to document your due diligence in selecting this hedge fund from among other investments. As the IAR for an RIA, you must satisfy your fiduciary obligations to clients and prospective clients.

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Alison Perrin said:

August 7, 2014 — 12:19 AM UTC

So how can an advisor get their message out there in a big yet compliant way?


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