The Securities and Exchange Commission should be applauded for its new guidance on third-party review sites and financial adviser testimonials, and for clarifying what advisers can and can't do when it comes to client reviews that are posted on sites such as AngiesList and Yelp.
But the move to define social-media ground rules also raises important and difficult questions: Who will enforce the guidelines that the SEC has developed for taking advantage of these review sites, and how are they going to go about it?
Like it or not, social media is part of our culture, and neither advisers nor regulators can stick their heads in the sand and ignore it.
As Liz Skinner reported, a survey conducted by Corporate Insight in December indicated that 67% of Generation Y/Millennials and 28% of baby boomers said that they would use an online search tool to find an adviser.
Such searches often lead to sites that feature customer reviews. Slowly, the SEC has come around to realizing that social media is here to stay and has tried to help advisers adapt to it to enhance their businesses, while at the same time protecting investors from its abuses.
(Don't miss: Client reviews and you: What you need to know)
First, some background.
Since 1940, the SEC has barred advisers from using testimonials in their advertisements. The rationale is that such testimonials, by their nature, are misleading in that they emphasize favorable comments and ignore those that are unfavorable.
However, social media wasn't around 74 years ago.
According to the SEC's new guidance, it is now OK for advisers to link to testimonials on these third-party websites as long as the adviser has no control over the reviews and the sites include both favorable and non-favorable comments.
The SEC said that advisers are allowed to cite their average client rating from these sites.
That is all good news, but advisers and the public need to know that these sites aren't without controversy. There have been serious allegations that at least some of the reviews on these sites have been written by freelance writers hired by companies to post favorable comments about the companies' services.
Last year, the New York Attorney General's Office fined businesses more than $350,000 for generating phony reviews online.
Yelp acknowledges that 20% to 25% of the reviews submitted to its site are suspicious, though the company claims that many of them are filtered out before they are posted.
Is the SEC prepared to start monitoring sites such as Yelp to make sure that unscrupulous advisers aren't rigging the system to attract more clients? And if such an adviser can pay to have a positive review posted, would he or she also pay for a fake review that is critical of a competitor?
PROCEED WITH CAUTION
Until such questions can be answered satisfactorily and review sites can do a better job of policing the people who are posting reviews, advisers should proceed with caution.
Advisers must remember that they can't pick and choose the reviews to which they want to link.
Advisers who link to a site should make sure that they know what the reviewers are saying about them and their businesses. At the very least, advisers should learn how to challenge a review they deem bogus or one that uses inaccuracies in its assessment of the firm's services.
As one social-media consultant told our reporter, “There's always a bad apple who figures out how to game the site.”
Advisers shouldn't let that bad apple take them down. Take the time to monitor what people are saying about your business and be prepared to fight back if necessary.