Do your homework before starting a newsletter

Newsletters are a great way for financial advisers to stay connected to clients, but they may also bring…

Newsletters are a great way for financial advisers to stay connected to clients, but they may also bring down the wrath of regulators if certain guidelines aren’t followed.

More advisers are using newsletters to inform clients about the markets and their investment decisions. Although most don’t consider their newsletters a form of advertising, the Securities and Exchange Commission does, and it is paying close attention to the advice and recommendations they contain.

“Advertising and marketing rules are a perennial focus of our examinations regardless of the form that the advertising or marketing takes,” SEC spokesman John Nester said.

In fact, improper advertising and marketing rank among the five most common deficiencies uncovered during SEC audits, he said.

Advisers’ interest in newsletters is a direct result of their recognition that they needed to calm clients’ fears during the financial crisis.

Many advisers turned to publishing quarterly, or even monthly, newsletters as a way to communicate with clients. Indeed, 73% of more than 400 advisers surveyed by SEI Advisor Network in April characterized improved client communication as a top priority for 2010.

“Advisers want to be proactive,” said John Anderson, head of practice management at SEI. “They can send an e-mail newsletter to clients about something timely … like when health care legislation passed.”

HNW Inc., a marketing services company that publishes newsletters to which advisers can attach their name, has seen a 15% increase in business from advisers during the past six months. Meanwhile, Forefield Inc., another financial services marketing company, has seen the number of newsletters it produces for advisers double during the past year.

Advisers that decide to publish a newsletter on their own must be aware of the pitfalls. Performance reporting is one area where advisers typically get into hot water with regulators.

For example, merely writing about a specific stock pick requires so much disclosure, advisers often inadvertently cross the line.

“Everyone wants to brag about their “call of the month,’ but that’s an advertising violation,” said Daniel Bernstein, director of professional management at MarketCounsel LLC.

SEC guidelines require that any mention of performance be accompanied by specific disclosures related to the time period during which that performance was achieved and apt comparisons to an appropriate benchmark.

Advisers also have to be careful when boasting about their accomplishments. If, for example, they want to inform clients about an award that they have received, they must include the exact criteria on which the award was based.

“Advisers don’t mean to be misleading. It’s hard to write an upbeat newsletter and not be misleading,” said Ruth Burgess, senior vice president and chief compliance officer for Invest Financial Corp., a broker-dealer.

“They like to puff themselves up,” she said. “But a lot of times, they don’t have the facts to back up the puff.”

The SEC expects all newsletters disseminated by advisers to be reviewed by a compliance officer. During an SEC audit, for example, it isn’t uncommon for examiners to ask for proof that content appearing in a newsletter was cleared by a firm’s compliance department, said Jennifer Klass, an attorney with Morgan Lewis & Bockius LLP.

“They’ll make sure that you have appropriate compliance procedures in place and that someone is reviewing all of these materials,” she said. “In the event of an audit, you need to produce all of that information to the SEC.”

Not surprisingly, many advisers outsource the production of their newsletters.

Companies that specialize in producing newsletters for advisers generally run all the content appearing in their newsletters by their own compliance officers. The cost for outsourcing a newsletter ranges from about $500 to $700 a year, depending on the frequency of publication and whether it is paper or electronic.

Even though these services provide the same content to hundreds of advisers, clients do read them, said Stacey Haefele, chief executive of HNW. She said that her firm tracks how many clients read the e-newsletters, and can even pinpoint which clients read which articles. On average, Ms. Haefele said, 40% of clients open the newsletters and read them.

“The adviser gets the credit,” she said. “It’s as if they made a phone call.”

Getting the compliance thumbs-up by using other firms to write the content has been a huge relief for Jeff Panik, vice president of investments at CBS Wealth Management, which manages $42 million in assets.

“I tried to do one myself, but from the compliance standpoint and then the review, it was just too much for me to deal with,” he said. “I have to figure out how best I can use my time.”

Joel Magruder, founder of Financial Partners Group Inc., which manages more than $100 million, has his own secret for getting newsletter articles through compliance.

He writes a series of short articles (about 200 words each) and sends them through compliance all at once. Then Mr. Magruder parcels out those compliance-approved articles to clients throughout the year.

“I try to stay pretty simple. I try to give some relative points,” he said.

“I don’t think anyone reads it for specific advice,” Mr. Magruder said. “They just want some general information.”

E-mail Lisa Shidler at [email protected].