Why RIA videos are especially fraught with regulatory pitfalls

In recent weeks, several articles have appeared in trade publications encouraging registered investment advisers to use videos as a marketing tool. While videos can be an excellent marketing tool, make sure your firm’s chief compliance officer is helping to direct the production.

Typically, RIAs use videos on their websites or upload them to YouTube. Some firms attach videos to their Facebook page or other forms of social media. See: Why compliance experts are apt to dislike Facebook.

Videos are subject to the same rule as other advertisements. Rule 206(4)-1 under the Investment Advisers Act, and similar state rules, prohibit advertisements that are false or misleading in any way. To comply with that standard, videos should not contain statements that might be construed as a guarantee or that promise too much. RIAs must never use testimonials, and there are restrictions on references to past specific recommendations. See: How far can RIAs go with advertisements?.

Thin line between compliance and non-compliance

Too many RIAs wait until their videos are shot to ask compliance to review them. The best approach is for the firm’s CCO to review the script before the video shoot. Otherwise, the project may need to be scrapped after considerable time and money has been wasted. See: Time for chief compliance officers to get tough and get smart, or else.

To avoid potential compliance problems, advisers should stick with the script that was pre-approved by the firm’s CCO. A word or two can make the difference between a compliant video and one that is potentially misleading. RIAs should also watch out for adjectives and descriptive phrases that cannot be proven with objective evidence. Furthermore, marketing hype is inherently misleading.

Videos should avoid statements that might be disputed by an examiner. For example, advisers that don’t make commissions on recommended investments sometimes advertise that they have no conflicts of interest. Meanwhile, their Form ADV disclosure brochures reveal that they do have conflicts of interest.

Some RIAs make videos as they conduct marketing seminars or speaking at client appreciation events. If attendees faces are shown in the video, an examiner might view them as implied testimonials for the adviser. Certainly, attendee comments about the adviser should never make the final cut of the video. These comments would certainly be viewed as a testimonial. It is also a good idea to stay away from shots of the audience wildly applauding the seminar or giving a standing ovation.

In one video, the adviser referred to himself as a registered investment adviser. In fact, its the firm that is an RIA, not the person giving advice. That individual is an investment adviser representative (“IAR”). In some instances, it may be necessary to disclose that registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean that IARs possess a particular level of skill or ability. In a video or any advertisement, firms should never use the initials, “RIA” or “IAR,” because prospective clients may mistakenly believe they are a designation.

Dress to impress – but skip the monograms

Although I am the last person who should be giving fashion advice, appearance is an important consideration in RIA videos. Investment advisers need to evaluate how prospective clients will view their wardrobe. There is a fine line between looking successful without coming off as someone will spend every dime of the client’s fees on clothes. An expensive suit, a monogrammed shirt, expensive jewelry, and gold cufflinks may be off-putting to some prospective clients.

It may be misleading to shoot the video in a fancy office with high-end furniture if the adviser’s real office looks nothing like it. RIAs have been criticized for implying that their firm is larger and more successful than it is, so a video should not show an adviser in a crowded conference room surrounded by people who appear to be employees but aren’t.

Disclosures help to ensure that videos are not misleading. If a video is on the firm’s website, it is easier to include disclosures. RIAs might also need to include disclosures at the end of their videos. If a video is posted on YouTube, RIAs should make sure their disclosures come along for the ride.

Full disclosure

The type of disclosures required depends upon the content of the video. If the video refers directly or indirectly to the firm’s performance, the RIA should adhere to the guidance contained in the Clover Capital no-action letter and must provide lengthy disclosures. Among other possible disclosures, viewers should be told that the RIA is not providing personalized investment advice, and there can be no assurance that any strategy will be suitable or profitable for an investor’s portfolio. In addition, videos that discuss estate planning or legal matters should disclose that the RIA is not engaged in the practice of law.

While videos are a great way to market IARs and RIAs, don’t get carried away. I reviewed an RIA’s website recently, which contained a number of videos and not much written content. Remember that a prospective client might only be taking a quick look at your website and won’t necessarily have the patience to watch a video. In addition, prospective clients might have difficulty watching videos if they have older computers.

While videos can be excellent exposure for an advisory firm and might help prospective clients get to know the adviser, they may also attract regulatory attention. At an educational conference sponsored by the Pennsylvania Securities Commission on Oct. 20, a compliance examiner warned that RIAs are sometimes targeted for examinations as a result of their advertisements. That’s not the target audience an RIA wants for its videos.

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). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.