State-regulated advisers want a piece of testimonial marketing action

State-regulated investment advisers are seeking the same latitude to use testimonials to promote their firms that larger advisory firms will have under a new SEC rule, but they will have to wait for their individual states to make that decision.

In late 2020, the Securities and Exchange Commission approved a sweeping 430-page regulation that updated investment-adviser marketing rules for the first time since the 1960s.

The measure would allow advisers to use testimonials, endorsements and third-party ratings as long as they comply with anti-fraud protections and other conditions. The new rule incorporates social media communications, expanding the previous rule’s focus on written communications, television and radio advertising.

The SEC marketing rule, which goes into force in November 2022, applies to advisers regulated by the agency and who have $100 million or more in assets under management. Advisers with less than $100 million AUM are regulated by the states.

Smaller state-level advisers want a piece of the testimonial action so that they, too, can post interviews with clients on their websites, use client quotes in marketing materials and produce advertisements featuring clients.

“That level of social proof is certainly an advantage for those SEC-registered advisers,” said Chris Russell, founder of Tempus Pecunia. “It would be nice if state regulators would align themselves with SEC regulations as soon as possible so there’s a level playing field.”

The term “social proof” refers to testimonials and reviews from customers that can persuade other people searching online to contact a business. It’s how potential clients are increasingly finding advisory firms, advisers said.

“They do significantly influence people’s first impressions, how they start thinking about things,” Noah Schwartz, owner of Blueprint Financial Strategies, said of testimonials. “Not only does it level the playing field between firms, it allows people to get insight into the firms they’re going to talk to.”

Using testimonials is crucial for advisers because it can help them build rapport with potential clients, said Elliott Weir, founder of III Financial.

“This business is about trust, and testimonials build trust,” Weir said.

Whether state-regulated advisers will be able to use testimonials depends on whether their individual states will allow it. Maryland Securities Commissioner Melanie Senter Lubin said states will monitor how the SEC rule works.

Lubin was recently elected president of the North American Securities Administrators Association, the umbrella organization for state regulators that will be influential in determining the extent to which states allow testimonials for their advisers.

“Our investment adviser section is going to watch this and see whether it serves investors,” Lubin said of the SEC testimonial rule. “Does it look like it’s an appropriate change that the states should then make through a model rule and then adopt on a state-by-state basis? It’s something we’re aware of and keeping an eye on.”

The compliance consulting firm Advisor Assist has reached out to all states about testimonials and received mixed responses.

“For the most part, states are taking a wait-and-see attitude because the [SEC] rule isn’t in place yet,” said Ann Keitner, assistant vice president and senior compliance consultant at Advisor Assist.

It’s the potentially slow pace of state action that has Ben Lies concerned.

“We’re stuck with the old rules for who knows how long,” said Lies, president of Delphi Advisers. “It puts one at a pretty severe marketing disadvantage compared to larger firms.”

For many advisers, investment management is not their value proposition. Rather, it’s who they serve and how. That’s where testimonials come in.

Colton Etherton, founder of Out of the Office Planning, has developed a niche among tattoo artists in the Portland, Oregon, area.

“Some artists are hesitant when it comes to finances,” Etherton said. Testimonials succeed in “showing that I’m not just full of it, I’m helping people who are similar to you. It helps break down barriers.”

Tyler Smith, owner of BBK Wealth Management, would like to use testimonials to promote his firm, which has only been up and running for about a year.

“These testimonials would mean so much to smaller firms -- [demonstrating] authenticity and sharing your story,” Smith said.

 But he would be hesitant to move ahead without regulatory certainty.

“There’s just no clarity on it at all right now,” Smith said. “I don’t even want to touch it until I know it’s not a red flag. I don’t want to be the trial case.”

That’s an approach that Keitner is recommending to her clients. She points out there are a lot of disclosure requirements and other safeguards related to testimonials. For instance, advisers have to show they didn’t “cherry-pick” clients who appear in them.

Even SEC-registered advisers should go slowly on testimonials until they see how the SEC is going to evaluate them.

“Caution is the best path to take,” Keitner said. “With any new rule that comes out, you don’t want to be the first one using it.”