Four active marketing strategies that can lead to compliance trouble

In my last posting, we took a tongue-in-cheek look at advertisements that registered investment advisers might use (See: How far can RIAs go with advertisements?). In response to my posting, one Wisconsin adviser joked that his firm advertises on bathroom walls with the tagline, “Don’t flush your money down the toilet.”

In all seriousness, however, there are many ways for RIAs to advertise in good taste while complying with the advertising rule.

Many advisers rely on a passive marketing approach, such as word-of-mouth referrals. Most experts believe, however, that active marketing strategies have the potential to be far more effective. Unfortunately, certain active marketing strategies may violate the restrictions placed on RIA advertisements by securities regulators. Here are four strategies that advisers should use with caution:

#1: Client satisfaction surveys

Some marketing gurus encourage the use of client satisfaction surveys to measure how well the firm is performing from the client’s vantage point. The results of these surveys can provide valuable input on what the firm’s strengths and weaknesses are. These survey results can help RIAs craft their marketing message. They can also enable the RIA to change its business practices to increase customer satisfaction and avoid losing clients who may be dissatisfied with the firm.

Nevertheless, misuse of these survey results can create compliance problems. Some RIAs make the mistake of advertising survey results or favorable client comments, which is likely to violate the rule prohibiting testimonials.

Sharing those results in letters and e-mails to clients is also risky from the standpoint of compliance. Communications with clients must be thorough, complete and not misleading in any way. Therefore, you should not mischaracterize the survey results or state how beloved your firm is if the data suggests otherwise. In addition, your summary of the results may be misleading if surveys were formulated in a way to elicit favorable responses.

#2: Client advisory boards

A few marketing experts recommend that RIAs create a client advisory board. Members meet several times each year and offer suggestions as to improvements the firm can make. While this may be a great business practice, you should not put photographs or the names of the client advisory board’s members on your website. Clients or potential clients might view the photos as an implied endorsement of the RIA by members of the board. Worse yet, securities regulators might view these endorsements as implied testimonials.

#3: Gifts for referrals

Some RIAs ramp up their referral program by offering gifts to clients who help them bring in new business. Offering compensation in exchange for referrals may turn the client into a solicitor, which triggers a number of other compliance requirements.

#4: Freebies for clients

You also need to be cautious with advertisements offering freebies to prospective clients. Rule 206(4)-1(a)(4) under the Investment Advisers Act precludes the use of an advertisement offering a free report, analysis or other service, unless it will be furnished without cost or obligation. In addition, you need to be extremely careful when conducting free lunch seminars, since regulators are keeping a watchful eye on them.

What’s next for RIA ads?

When it comes to RIA ads, it’s hard to say what creative approaches will come next. On a recent flight, there was an advertisement for Verizon Wireless on my seat tray. Although the seat tray ads were already taken, there appeared to be plenty of available advertising space on the walls of the airplane bathroom.

Thankfully, RIAs and other firms have refrained from advertising on airplane bathroom walls. If that time comes, however, I’m betting the walls will be covered with ads for law firms.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment 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.