MARKETING WITH REVIEWS
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Some States Say Not So Fast to SEC Marketing Rule
By Brian Thorp
Since first proposing to modernize its marketing rules for federally registered investment advisors in a 2019 press release, the Securities and Exchange Commission (SEC) made clear its stance that permitting the use of testimonials and third-party ratings could “improve the quality of information available to investors, enabling them to make more informed choices.”
Given the chorus among federal and state regulators to promote “best interest” standards for clients of RIAs, what could explain the hesitation among certain states to adopt an SEC rule designed with the best interest of prospective RIA clients in mind?
In this article, we’ll share insights into the rule modernization activities of state regulators, offer perspective on the consequences to consumers and advisors in states that have failed to modernize their advertising rules, and suggest actions state-registered advisors might consider in an effort to end unfair business practices.
Some State Regulators Appear Reluctant to Modernize Advertising Rules
When the SEC Marketing Rule became effective on May 4, 2021 (in the form of amendments to Rule 206(4)-1 under the Investment Advisers Act of 1940), a few state regulators quickly followed in the SEC’s footsteps, updating their advertising rules for in-state advisors to collect testimonials and display reviews online.
Among the first states to let in-state advisors begin collecting and promoting testimonials were those with rules that incorporate SEC Rule 206(4)-1 by reference and whose regulators acknowledged and adopted the amendments that became effective in 2020 (e.g., Massachusetts and Georgia).
Subsequent to 2020, several other states have taken action to modernize their rules by either directly acknowledging the updated SEC Marketing Rule (e.g., Florida) or granting sufficient leniency for in-state advisors’ use of testimonials, as long as they abide by governing federal law and SEC rules (e.g., New York). And at least a couple more states (e.g., Texas and Oklahoma) appear likely to permit testimonials this year, following publicly announced regulatory rulemaking procedures.
Yet, other states incorporating SEC Rule 206(4)-1 by reference (e.g., Kansas) or with rules that mirror language from the SEC Rule prior to its modernization (e.g., Alabama, California) have chosen to maintain rules prohibiting advisors’ use of testimonials.
As an advocate for state-registered advisors, Wealthtender maintains an online database with feedback received from state regulators over the last three years. While the regulators in certain states that continue to prohibit testimonials appear empathetic and open to change, others do not.
For example, when asked for an update in April 2024, a representative from the California Department of Financial Protection & Innovation said, “California is not considering changing the regulation/policy in the foreseeable future.”
Penalizing Small Business Owners and Confusing Consumers
In states like California and others where state-registered advisors remain unable to solicit or promote client testimonials, inaction by state regulators to modernize their rules creates an uneven playing field for advisors and a poor experience for consumers.
Imagine a married couple in San Diego that has narrowed their search to advisors employed by three firms, an SEC-registered firm headquartered in Nebraska, a New York-based broker-dealer, and a California state-registered investment advisor. As part of their evaluation, the couple speaks with advisors at each of the three firms and visits their websites to assess their experience and credentials.
Just as they do prior to hiring any professional, the couple looks online to read reviews for each financial advisor and learn what clients have to say about their experience. Somewhat perplexed to find positive reviews for two of the advisors and no reviews for the other, the couple narrows their search further to the two advisors employed by firms not based in California.
In this situation, the California couple, likely unaware of whether the advisors on their shortlist are state or federally registered, might simply believe the advisor without client reviews is less experienced or may be less trustworthy than advisors with published client testimonials.
While this example is hypothetical, studies confirm the importance of online reviews among consumers preparing to hire trust-based professionals.
In fact, a 2023 study conducted by Martindale-Avvo to understand the top factors influencing the consumer decision-making process when hiring attorneys found “consumers consider online reviews as the most important criteria for an attorney’s reputation” and among the top three factors consumers rank as important when looking for an attorney.
Sticking with the California example, the unintended consequences of regulators in the Golden State failing to modernize their marketing rules while SEC-registered advisors incorporate client testimonials and online reviews in their marketing activities include the possibility that:
- California residents could believe federally registered advisors are more experienced and trustworthy than California-registered advisors.
- National advisor networks headquartered outside of California will maintain an unfair advantage in attracting new clients over California-registered advisors.
- California-registered advisors will face increased pressure to affiliate with an SEC-registered firm to protect their financial livelihood and avoid being disadvantaged in establishing trust with consumers.
- Fewer independent advisors will choose to operate as small business owners in the state of California, reducing consumer choice and discouraging entrepreneurship.
Of course, California is just one of several states where the impact of inaction by regulators could grow exponentially in the coming years as online reviews of SEC-registered investment advisors proliferate. Search engine algorithms tend to rank businesses and professionals with positive reviews higher in search results, penalizing state-registered advisors with a greater risk of going unnoticed.
State-Registered Advisors Can Take Action
As advocates for state-registered advisors, organizations like NAPFA, local Financial Planning Association (FPA) chapters, XY Planning Network, and Wealthtender have taken steps to raise awareness of the uneven playing field for advisors and the negative consumer experiences inevitable to result within states that continue to prohibit advisor testimonials.
Financial advisors who are state-registered can also play a valuable role in effecting change.
Individual advisors can contact their elected state representatives, who may not be familiar with the inequity created by regulators, and encourage action. The non-partisan nature of this matter that favors out-of-state businesses over local entrepreneurs should fire up politicians on both sides of the aisle.
Advisors who are FPA members might choose to coordinate efforts through their chapter leadership to bring heft to conversations with elected officials and directly with state regulators. And state-registered advisors who are small business owners can educate leaders of their local chambers of commerce on the issues to instigate action with state legislators and representatives.
The Five-Star Moment for State Regulators
The SEC deserves credit for modernizing its rules to permit advisors to solicit testimonials and display online reviews that help consumers make more informed and educated hiring decisions. And many state regulators deserve five stars for following in the SEC’s footsteps.
Today, more than three years after the SEC Marketing Rule became effective, it’s time for all states to follow suit or risk residents concluding that advisors employed by larger firms must be more trustworthy and reputable than independent advisors operating small businesses in their communities.
Brian Thorp is the founder and CEO of Wealthtender, the industry’s first SEC-compliant online review platform for advisors and the #1 independent find-an-advisor directory visited by 500,000 consumers annually. Connect with Brian at (512) 856-5406 or brian@wealthtender.com.
image credit: istock.com/matdesign24
