Testimonials and Advisors: The New Marketing Rules

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If you’re interested in finally sharing testimonials from satisfied clients, here’s everything you need to know.

Many consumers now rely on customer reviews to choose everything from their plumber to their doctor. Since prospective clients often look for reviews, but advisors previously could not provide them, advisors have long been in a difficult position. Their inability to use testimonials to market their services has long been a major complaint among advisers. Thankfully, the SEC took these concerns into account and updated its marketing rules to allow for testimonials. But that doesn’t mean anything goes. Advisors wishing to use testimonials must still abide by certain rules.

What Constitutes Marketing?

Before we dive into the updates to the marketing rule, let’s first take a step back and address exactly what the SEC means when it refers to marketing. The term may seem obvious, but many advisors end up with compliance issues simply because they didn’t consider a specific medium a form of marketing. 

According to the SEC, there are now two definitions of an advertisement, the first of which comes from the traditional definition, and the second of which has been added to include activities of solicitation. 

“First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions.

Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).” 

In layman’s terms, just about anything that isn’t a one-on-one communication is an advertisement. Your website is an advertisement, your social media accounts and posts are advertisements, any mass emails are advertisements, and of course any of the other more traditional advertisements, such as ads in/on magazines, radio, TV, billboards, direct mail etc. If you’re still not sure whether something is an advertisement, this Advertising Checklist may help. 

What’s important to keep in mind is that if something is deemed an advertisement, the marketing rule applies. There’s not one set of rules for your website, one for social media, and another for print advertisements. For example, if you can’t say it or can’t say it without disclosure in a print ad, then you can’t say it on your website or in a social media post. 

Testimonials Before the New Marketing Rule

Prior to the adoption of the new marketing rule, advisors could not use testimonials in essentially any form. Positive reviews from clients, ratings, or any form of client satisfaction supplied or made available by the advisor were not allowed. Even endorsements supplied without encouragement through LinkedIn constituted testimonials according to the SEC and therefore were not allowed. In classic SEC fashion, the new marketing rule does not remove the prohibition of testimonials but instead adds in ways in which advisors may get around the prohibition. Specifically, “the marketing rule prohibits the use of testimonials and endorsements in an advertisement, unless the adviser satisfies certain disclosure, oversight, and disqualification provisions.” 

What are those disclosure, oversight, and disqualification provisions? Let’s see. 

Testimonials Under the New Marketing Rule

As mentioned previously, the new marketing rule does not allow advisors free rein when it comes to posting testimonials, but it does allow them to use them if they abide by certain rules. These include proper disclosure and oversight, as well as a disqualification clause. 

Disclosure 

Arguably, this is the most applicable part of the update for most advisors. Essentially, if the person providing the testimonial received compensation or had a conflict of interest, you’re required to disclose this information. Compensation in this sense includes, but is not limited to, direct cash payments. You must also disclose whether or not the individual providing the testimonial was a client. 

Oversight 

Any promoter who is not an affiliate of the advisor or who earns more than $1,000 in compensation must enter into an agreement with the advisor. 

Disqualification 

The SEC included a blanket disqualification to cover any potential “bad actors” who may act as promoters. 

Testimonials vs Third Party Ratings

How the Marketing Rule impacts third party ratings is also worth noting, since testimonials and ratings go hand in hand. First of all, what’s the difference? A testimonial is a rating or comment from an individual, typically a client. On the other hand, third party ratings come from a group or organization not affiliated with the entity. Third party ratings may include awards or recognitions for the company such as Best Place to Work or for individuals, such as an employee who is a recipient of a 30 under 30 award. Even if third-party ratings do not apply directly to the investment services offered by the business, they are still advertisements for the business. 

Similarly to the updated rules around testimonials, an adviser is prohibited from including third party ratings in an advertisement, though exceptions are made as long as proper disclosures are included. In other words, you can include third party ratings in an advertisement (such as announcing the receipt of an award on social media on your website or social media pages, but you must include the proper disclosure). 

Proper disclosure on any rating, based on client feedback or otherwise, includes: 

  • The criteria the rating was based on 
  • Who conducted the survey and whether the advisor paid to be included 
  • If there are both unfavorable and favorable ratings, both must be included (and the adviser shouldn’t imply it was top-rated if it was not first in that category). 
  • If the rating relates to client experience, you must disclose that the rating is an average and therefore may not represent every client’s experience. 

The Takeaway 

After years of frustration from advisors, the updated marketing rules provide some much-needed freedom for the industry to engage in a form of advertising now considered the norm in almost every other industry.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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