Catchwords and strategies likely to draw regulators' ire -- and others that pass anyone's test

December 23, 2010 — 2:51 PM UTC by Les Abromovitz, Columnist

0 Comments

If I were Santa Claus, which seems to be a bit unlikely at this stage of my career, I would compile a list of all the naughty and nice marketing strategies that investment advisers utilized in 2010. Although none of these naughty marketing approaches will get you sent to the SEC’s secret prison at the North Pole, they may make the Commission skeptical about your compliance program. (If anyone asks, you didn’t hear about that secret prison from me.)

The standard for being naughty is whether you are complying with all of the fiduciary obligations you owe to clients and prospective clients. If I were Santa Claus, I would also focus on whether you and your firm are in compliance with Rule 206(4)-1 under the Investment Advisers Act of 1940 or similar state regulations. The key issue is whether your website, marketing materials, blogs, newsletters, and social media profiles are false or misleading in any way.

Embellishment, exaggeration and marketing hype in advertisements are inherently misleading. As an example, neither Santa nor securities regulators will believe your firm’s business model, philosophy, ethics and investment approach are superior to other advisers, even though you tout your superiority in advertisements.

In addition, I frequently review marketing materials and websites that claim the Registered Investment Adviser (“RIA”) is unique in one way or another. Saying your firm is unique five or more times in your website won’t differentiate your services from other RIAs. Recently, one RIA firm that I work with claimed to have created hundreds of unique solutions. Those kinds of claims invite a securities examiner to ask for proof that the firm’s solutions are truly out of the ordinary. A better choice of words might be to say that you offer fresh, sophisticated, innovative, or customized solutions.

Unique? Not so much

In recent months, I have encountered Investment Adviser Representatives (“IARs”) who claim in advertisements that their backgrounds are unique. On closer inspection, their credentials and experience look very similar to other IARs. In contrast, if you lived and worked around the world or held jobs in a particular industry, you might be able to tout your unique perspective on certain kinds of investments. You need to substantiate why your background is unique.

As they court new clients, only naughty IARs promise more than their firm can deliver. This approach leads to disappointed clients on Christmas morning and throughout the year. It is always a bad idea to create unrealistic expectations as to what return clients might anticipate. When discussing past performance, you should always be sure those results are presented net of your advisory fees and other costs. You should also disclose all of the reasons why the client’s portfolio may not perform as well as you hope it will.

Warms the heart

When it comes to disclosures, some RIAs go over and above the call of their fiduciary duty. I’m pleased to see marketing materials where the adviser weaves disclosures into the content instead of burying the risks in footnotes. It warms my heart on a cold winter’s morning in Delray Beach, Fla., to see advisers explain what their strategies are in plain English that unsophisticated investors can understand.

RIAs and IARs can go from nice to naughty in the blink of an eye. Although advisory firms and IARs can distinguish themselves by communicating regularly with clients during good times and bad, unclear communications that confuse or mislead will make securities regulators see red—even when Rudolph isn’t around. Sending a text message to clients isn’t the same as communicating with them in a meaningful way. Furthermore, I have encountered a few RIAs that spend so much time and effort trying to attract new clients, their existing clients do not receive the quality service they deserve.

Aside from compliant advertisements, don’t forget about your other compliance obligations, such as creating your narrative Form ADV, conducting the annual audit of your policies and procedures, and making sure all reports required to satisfy the Code of Ethics Rule are submitted.

In fact, some advisers fail to fund their IARD account and renew their registration in December, because they’re too busy marketing their services and getting ready for the holidays. If that happens to your firm, you may be asking Santa to bring you a new career.

Les Abromovitz is a senior consultant with 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.


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.

Submit your comments: