A marketing conundrum

After moving into its new office in Miami, Kaufman Rossin Wealth added character to its white walls by hanging paintings by Romero Britto, an artist based in the city who is also a client.

“It’s very fun and bright,” Charles Sachs, the firm’s chief investment officer, said of the Brazilian-born creator’s work. “You stick a Britto on them, and they come to life.”

Kaufman Rossin Wealth is part of Kaufman Rossin, the largest CPA firm in Florida. The parent firm hopes that Britto’s spirit rubs off on it through a testimonial it recently produced and is now distributing.

“Everybody in Miami knows him,” Sachs said. “You say he’s a client, and there’s some cachet to it.”

In the segment, which is called a “Client Spotlight,” the firm explains how it began advising Britto on his business and then expanded to offer him insurance and personal wealth management. Britto says that as his enterprise has become more complex, he “loves working with Kaufman Rossin.”

In the middle of the video, disclosure text appears at the bottom of the screen. It says that Britto has been a client of the firm since 2020. It goes on to warn that his experience may not reflect the experience of other clients, nor does it guarantee future success or performance by the firm.

That hedge was included so that the video doesn’t run afoul of the SEC marketing rule that will go into force on Nov. 4. The first overhaul of SEC advertising rules since 1961, it allows investment advisers for the first time to use testimonials and endorsements.

“There’s a lot of room to get creative and tell your story.”

Max Schatzow, partner, RIA Lawyers

The measure also applies to the many other forms of advertising — such as online videos and other social media — that hadn’t been invented when the original rule, which focused on TV and print ads, was promulgated.

Kaufman Rossin took its time putting together the Britto video in part to ensure it aligned with the Securities and Exchange Commission marketing rule.

“We wanted to get it right and be in strict compliance,” Sachs said.

MULTIPLIER EFFECT

The marketing regulation has captured the imagination of the investment advisory world because it allows advisers to add a multiplier effect to referrals. They can now distribute online and over the air good reviews by clients and third parties.

“There’s a lot of room to get creative and tell your story,” said Max Schatzow, a partner at RIA Lawyers. “We’ll see a lot more testimonials and endorsements.”

That freedom, though, comes with myriad obligations governing adviser ads that are sprinkled throughout the 430-page rule. This could lead to tension between the marketing and compliance sides of advisory firms.

“A lot of advisers are itching to move forward in this testimonial and endorsement realm,” said Jennifer Krakower, managing director at AdvisorAssist, a practice management and compliance consulting firm. “The challenge for [chief compliance officers] is potentially not having the framework in place to oversee the use of these testimonials and endorsements.”

Often, it’s the small advisory firms that have trouble complying with SEC rules because of their limited compliance staff. That may also be the case with the SEC marketing rule. But when it comes to testimonials, large firms also may have a problem because they need to track the client raves that each of their advisers wants to use.

“How you manage that for a 10,000-person shop is going to be very difficult,” said Bill Simpson, compliance principal at Hearsay Systems. “Scalability is going to be the thing that separates large shops that can do this from large shops that can’t.”

THE SWEET SPOT

Hitting the sweet spot between taking advantage of new marketing opportunities and staying in compliance will be a big challenge for advisers.

For instance, among the requirements for adviser ads is that they are fair and balanced. If an adviser highlights a few clients who swear by her, she has to mention they might not all agree.

“Your one client may love you, but how many other clients do?” said Ann Keitner, senior principal consultant at ACA Group, a compliance consulting firm. “You have to do your homework. It’s a potential obstacle. It’s a pretty heavy lift [for advisers] to get to sound bites from their clients.”

It may be too early for some advisory firms to determine where they fall on the testimonial risk-reward spectrum. They’ll be watching what happens at Kaufman Rossin and others that jump in.

“Not many firms are embracing testimonials just yet,” said Amy Lynch, president of FrontLine Compliance. “They want to see who ends up succeeding and who ends up failing. They want to see how it’s being navigated by other firms. Let someone else test the waters.”

As exciting — or worrisome — as testimonials can be, they’re only one part of the expansive marketing rule. It replaces decades of SEC no-action letters addressing various adviser queries about what was and wasn’t permitted under the rule that will be phased out on Nov. 4.

The new regulation overhauls one that has been causing confusion for more than a generation. But that doesn’t mean that everything will be crystal clear about the rules of the road for advisers who are promoting their business through advertising campaigns and by hiring solicitors.

The rule has a broad definition of advertising, which encompasses any direct or indirect communication an adviser makes that offers the adviser’s services, as well as any endorsement or testimonial that an adviser pays for.

SEVEN PROHIBITIONS

Basically, advisers have to ensure that messages they disseminate on TV, radio, websites and social media comply with the disclosures and obligations in the marketing rule. There are seven general prohibitions, which prevent advisers from making untrue, unsubstantiated or misleading statements and presenting potential benefits in a way that is not “fair and balanced” with mentions of potential risks and limitations.

The marketing rule allows advisers to use examples of past performance in their advertising. But that opportunity also comes with a litany of restrictions, such as prohibitions on using gross performance, cherry-picking results and highlighting performance beyond a specific time period.

Advisers have to be careful when they highlight on their own website a third-party endorsement on a separate platform. Once they link to that, they’re “entangled” with it, and it falls under the marketing rule.

“The new rule is incredibly complicated,” said Christine Lombardo, a partner at Morgan Lewis. “While it is more flexible, it is much broader in application than the old rule.”

It’s also principles-based rather than prescriptive, which means that there’s no clear-cut direction for how to comply. Essentially, compliance will evolve from SEC exams, guidance and ultimately, enforcement.

“With [the rule’s] flexibility comes grayness and a little bit of ambiguity,” said Ed Wegener, managing director at Oyster Consulting. “There’s going to be tension between the business side that wants to market things in a certain way and the compliance side that has to decide whether that is compliant with a principles-based rule that leaves a lot of room for interpretation.”

PERFORMANCE STANDARD

For instance, the SEC is seeking to standardize performance presentations, some of which will now have tailored requirements. But that doesn’t mean that all advisers will do them in exactly the same way. Similarly, it will be difficult to know for sure who is compliant and who is not in all kinds of advertising.

“There are some issues that are clear,” said Sanjay Lamba, associate general counsel at the Investment Adviser Association. “There are some that will take longer to figure out.”

The SEC provided a preview of how it will examine for compliance with the marketing rule in a September risk alert. The agency highlighted priorities for probes, including an evaluation of written policies and procedures, an assessment of whether advisers can back up their ads with facts, an analysis of whether they’re presenting performance correctly, and a review of books and records.

But compliance experts want the SEC to be more forthcoming about what it expects of advisers.

“We haven’t gotten real guidance,” Lombardo said. “[Advisers] want to comply. They want to understand how to do that in certain situations and what the SEC will view as compliant.”

Advisers have been looking ahead to the marketing rule ever since it was introduced in December 2020. When they learned in May 2021 that they had until this November to comply, some thought the timeframe was too short.

Surveys by the IAA over the last two years show that the marketing rule was at or near the top of advisers’ compliance concerns. The interest was demonstrated internally at the IAA when 375 of its members joined a working group on the measure, a record for the number involved in such an effort.

BE PREPARED

The preparation for the rule seems to be paying off at crunch time.

“I feel really good about where our members are,” Lamba said. “They’re making super efforts to be ready for Nov. 4.”

The advisers who put off thinking about the rule until this fall will find themselves scrambling not only to write new policies and procedures but also to review their current marketing materials.

“It’s not just a one-and-done process,” Lynch said. “It’s going to take longer than they think to get everything in place. Once they get into it, they find it’s a bigger lift than they thought.”

Once their compliance ducks are in a row, advisers will be confronted with the question of whether potential marketing rewards under the rule are worth the risk.

“When the dust settles on implementation, I’m hopeful that the rule will allow for better and more effective engagement with clients and potential clients,” Lamba said.

[More: State regulators look to keep pace with SEC marketing rule]

Related Topics: Kaufman Rossin WEalth, Securities and Exchange Commission