The SEC’s
But in the process, the rule could further advantage bigger firms at the expense of smaller ones.
"What this does now is I think for these larger firms is it kind of opens up the floodgates for direct marketing to become a primary part of the client acquisition process," says Duncan Rolph, managing partner at Miracle Mile Advisors, a $2 billion-AUM RIA in Los Angeles.
Rolph anticipates a gradual shift away from the nearly complete reliance many firms place on referrals to bring in new clients. "I think there's going to be some real winners and losers because the firms that don't have the resources or the acumen to expand their online footprint are not going to take advantage," he says.
"I think being able to go out there and actively reach prospective clients in the ultrahigh-net-worth space on a direct basis online is going to be a game changer for us," Rolph continues. "I think you're going to see a lot more money flow into direct marketing, especially online direct marketing. I think the biggest change is going to be on social media."
The commission also opened the door to firms including client testimonials and paid endorsements in their marketing materials, as well as an objective presentation of performance data.
No dings for 'likes'
Including previously off-limits testimonials in advisors' marketing activities will be a "huge step forward," according to Stacy Sizemore, chief compliance officer at tru Independence, a service provider for independent RIAs.
"The most exciting thing about these new rules is that we will be able to promote the testimonials, but more importantly our performance numbers," Sizemore says.
Included in the rule is some welcome guidance around social media, affirming that advisors will generally not be held accountable for how their posts are shared or liked — so long as the firms themselves aren't tipping the scale by selectively altering or deleting content. The SEC also recommends that firms revisit their policies around social media, including enacting a firewall between employees' personal accounts and the firm's marketing activities.
Sizemore’s firm is already exploring how it can incorporate the new provisions in the SEC's rule to help advisors enhance their marketing efforts, an initiative she acknowledges will require considerable compliance retraining.
All or nothing
The extent to which firms embrace social media or any of the other changes included in the long-awaited update of the advertising rule remains to be seen.
Even if the impact of the new marketing rule will be profound, it will also be gradual. The regulation will take effect 60 days from the date it appears in the Federal Register. (The SEC did not immediately respond to a question on when the rule might appear in the Federal Register.) Then, advisors will have 18 months before they are required to comply with the new regulation, though they are permitted to update their advertising programs before that date, which some firms likely will do once the SEC comes out with new materials to help firms digest the marketing rules.
"No one's doing anything until the rule takes effect," Rolph says. "We're all assuming there's going to be additional guidance that comes along with this."
The SEC has also stipulated that firms cannot pick and choose which parts of the rule they want to adopt; if a firm takes advantage of one provision in the rule, it must implement the whole package.
That means that firms looking to expand their social media presence or embrace new permissions on endorsements and testimonials will have their compliance teams working overtime to sort through the 430 pages of the updated rule, another factor that could put smaller firms at a disadvantage with their larger rivals.
"It does open up additional opportunities, but the vigilance of making sure you're complying has not been reduced," says Evelyn Zohlen, president of Inspired Financial, an RIA based in Huntington Beach, California. "As the chief compliance officer for my firm, I still need to be very vigilant about this."
‘Friends, family and dog’
Many of the provisions of the new rule, such as those inviting advisors to promote their practices with client testimonials and paid endorsements, carry significant disclosure requirements. So, too, do the provisions around third-party ratings.
Compliance experts caution that the SEC will expect advisors to conduct their own due diligence and ensure that they are presenting meaningful rankings and not engaging in the type of behavior that has challenged consumer-generated ratings systems since they first appeared on the internet.
Christine Gaze, managing partner at the Purpose Consulting Group, envisions a scenario where unscrupulous advisors are "having their friends, family and dog" post favorable reviews in an effort to game the ratings sites.
"I think it's going to open the door for — unfortunately — salacious, terrible things on the one hand," Gaze says. "But the idea that there would be some objective rating system, that there would be a way to compare and contrast financial advisors that's done in a way that's [fair] — that's just long needed."
