SEC marketing rule is "challenging" to navigate, say advisors

Compliance and marketing are just two branches of a firm’s tree but they are both critical to a firm's operational success.

Advisors are constantly seeking for ways to refine their approach and increase their appeal to clients, but the SEC's Marketing Rule remains a significant compliance focus.

As we near the two-year anniversary since it went into effect, how are advisors complying with the rule? It turns out that, according to a recent report from the CFA Institute/IAA, advisors are still being cautious.

“The challenge is the fact all communications with clients or prospects fall under the Marketing Rule. We routinely need to impress this fact on advisors and representatives of the firm,” says one respondent in the report.

“[I'm] trying to decipher what the SEC is really looking for in certain situations without any guidance from them,” says another advisor.

One key takeaway from the report highlighted that roughly 39 percent of firms don’t present hypothetical performance. Of those that do, most do so only on a one-on-one basis or in response to unsolicited requests.

Kaitlyn Gibbs, director of regulatory research and regulatory change management at Compliance Risk Concepts, says while the Rule is supposed to be more permissive, there's still some opacity around what makes performance advertising permissible.

“How do you get there? How do you feel comfortable as an enterprise? Marketing that type of information when it was such a taboo subject and performance marketing was such a difficult thing to achieve and essentially embargoed altogether,” she says.

“It’s an area where firms do struggle, and it’s definitely an area where we are sought-after for advice, oftentimes, particularly where it comes to hypothetical performance,” she added.

Dinon Hughes, financial consultant at Nvest Financial, admits that the firm never openly marketed return data because aside from the compliance and legal headaches that have always surrounded it, “it opens up a can of worms in terms of client expectations.”

“We most certainly never include returns in our marketing material. We don’t want to attract the kind of clientele that would be enticed in the first place by an advertisement promoting “10 percent-plus returns” or some other fairytale,” he says. “Client expectations are typically unrealistic to begin with, especially when we have experienced times of large positive market gains as we have the past five years.”

“Recency bias is a very real thing,” Hughes added, remarking that if the firm is ever asked about returns, Nvest puts things in relation to the prospective client’s risk tolerance and time period, "versus giving them just some data to interpret."

“We want to stay away from performance,” says Andrew Evans, CEO and founder of Rossby. “That’s not what our advisors are touting [for the most part]. Our advisors talk about the planning process, long-term, smart, intelligent money decisions. Performance will come along with your general risk tolerance.”

“[The Marketing Rule] has 100 percent been a challenge,” says Jack Heintzelman, financial planner at Boston Wealth.

“If you have a prospect that comes across you through [your] website or through marketing, they want to trust but also verify that your performances are accurate,” he says. “As they're comparing you [to] other advisors, they want to see how you perform in the marketplace and what their expected performance and experience would look like for their portfolio, if they were to come work for you.”

That’s why when he meets with a client, he’s very clear on the firm’s investment process and their due diligence “to ensure that our prospects and the investments that we’re managing for those clients aligns best with their needs. It takes a little bit more of education.”

Gibbs says established firms often have more difficulty with the rule, finding it to be burdensome, cumbersome, and in some cases, overreaching.

 “They see the rhetoric in the news, and they see the types of findings that are coming across from SEC enforcement, and they are determined not to run afoul of them,” she says. “Sometimes they are so cautious that they're kind of limiting their advertising altogether.”

Evans cautions advisors who might go out of their way to talk "all about testimonials" and try to push on how their firm has performed.

“To me, that's along the lines of 'Live by the sword, die by the sword', because nothing is forever,” he says. “What your portfolio did yesterday doesn't mean it's going to do the same thing today. Past performance is not indicative of future results.”