What a strange world we find ourselves in today. Financial advisors are able to communicate using more methods than ever before. Digital media is becoming a greater and greater part of our daily lives. Advisors are urged to blog and participate in social media and through it all they are encouraged to engage with their audience.
Unfortunately there’s a black cloud hanging over their heads as they find themselves in fear of having a client actually say something nice about them on one of these digital media platforms. I see many discussion groups talk about what to do if a client likes a Facebook page or endorses an adviser on LinkedIn. Beware the testimonial.
There seems to be confusing information regarding the testimonial rule and its applicability. The key point usually made is that improper testimonials are statements by clients referring to the advisor’s skill as an investment advisor.
Because of this, many advisors seek ways to get client testimonials on points other than the advisor’s investment advice skills. They seek client endorsements as to the advisor being a nice person or a community leader or something along those lines. Some advisors are out there trying to get non-clients like other professionals or well known people in the community to give their thumbs up to their ability as an advisor, even sometimes specifically regarding investments.
SEC rule 206(4)-1(a)(1) applies to registered investment advisors and by extension their representatives and reads as follows: “a. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the Act, directly or indirectly, to publish, circulate, or distribute any advertisement: 1. Which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser….”
In a release last year about social media, the commission added: “The term “testimonial” is not defined in Rule 206(4)-1(a)(1), but SEC staff consistently interprets that term to include a statement of a client's experience with, or endorsement of, an investment adviser.”
This social media guidance from the commission gives credence to the interpretation of a testimonial as a statement from a client, but does little to back the assertion that a testimonial is skill specific.
Take a step back, and I find myself wondering why it matters. Do advisors really want or need to use clients in their advertising? I’m not sure this is particularly wise. Trying to flirt with that line is a good way to find yourself on the wrong side of it.
The actual testimonial rule specifically states that testimonials in advertising are deemed fraudulent. Fraud is a big deal. Why invite such scrutiny from regulators?
Beyond the regulators, advisors have a fiduciary duty and many like to make mention of that. Clients come first, after all. Who does the testimonial help, the client or the advisor?