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Testimonials in Social Media

What Investment Advisers need to know to handle the review process
Monday, February 8, 2021

Do testimonials work?

The data says they do across many industries, and it’s because people are so connected. Ninety-two percent of buyers read testimonials online before making a purchase, and eighty-eight percent of consumers say they trust reviews from strangers as much as reviews from family and friends.

Does this dependence on testimonials and reviews ring true across the financial sector and in testimonials for investment advisors, as well as it does in other B2C transactions?

We’ll find out this year, as the SEC has modernized its guidelines on testimonials in financial services. However, it stands to reason that people want that same feeling of trust and reliance from their financial services that they might experience when they’re choosing a checking account, a home builder, or an expensive household purchase.

While the rules on testimonials for investment advisor marketing have been modified and modernized, firms must still adhere to specific guidelines.  To use testimonials effectively in your firm’s advertisements, we recommend that you spend some time getting to know the new rule and creating the appropriate expectations within your organization.

1. Read the rule thoroughly.

While testimonials are now an option for advisers, that doesn’t mean advisers can have carte blanche when promoting themselves or sharing others’ positive feedback about them.

Instead, they must “[satisfy] specific disclosure, oversight, and disqualification provisions:

    • Disclosure. Advertisements must clearly and prominently disclose whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest. There are exceptions from the disclosure requirements for SEC-registered broker-dealers under certain circumstances. The rule will eliminate the current rule’s essential that the adviser obtains from each investor acknowledgements of receipt of the disclosures.
    • Oversight and Written Agreement. An adviser that uses testimonials or endorsements in an advertisement must oversee compliance with the marketing rule. An adviser also must enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
    • Disqualification. The rule prohibits certain “bad actors” from acting as promoters, subject to exceptions where other disqualification provisions apply.”

Make sure you understand the rule and have developed your own thorough interpretation, as well as an understanding of the risks that you incur by including testimonials before you move on to the next step.

2. Talk to your marketing colleagues.

As you layout your guidelines, it’s time for a sit-down conversation between the marketing and compliance teams.

Your firm’s marketers know the power of testimonials and how they can benefit your business. And you, through your research, know the limitations and boundaries of how testimonials can be used.

You need to sit down together and hash out a strategy for when and where testimonials can be used, what the disclosures will look like, and how the review process may be shaped.

A few helpful topics to consider in this conversation might include:

    • The length of disclosures: Terms that might trigger a longer or different disclosure (which can affect the design and aesthetics of a piece of marketing collateral)
    • The process if a testimonial doesn’t fall into the review guidelines: It can take the marketing team a lot of time to connect with clients who want to give testimonials and capture the appropriate information. It will undoubtedly be frustrating if there’s an issue with a piece, and they must go back to the client or scrap the work they’ve done. Talking it through pre-emptively can save that extra work and those potential issues from occurring. It can be problematic/unethical to adjust wording even slightly in a testimonial without the giver’s explicit permission, so if there are specific words or phrases to be avoided, the marketing team should know and provide that guidance in advance.
    • Anything that’s off-limits: You’ll want to ensure the marketing team has a clear understanding of the rule. If, from your review and consideration of the rule, there are certain products or areas where your firm won’t include testimonials, for the time being, talk this through early in the process.

While it can seem time-consuming to hash this out in advance, it’s better to be safe. It’s best to ensure the testimonials, which take time for the marketing team to procure and use, will be able to be used to your firm’s maximum benefit.

2. Create your own internal written policy for managing testimonials.

Once you’ve reviewed the rule modernization thoroughly, decide what these updates will mean for your business. Your compliance team should comprehensively analyze the risk, and you should choose as an organization what you’re most comfortable with.

For example, you may choose specific phrases to steer away from. You may set a specific amount that you’ll compensate your testimonial providers, or you may create a firm policy that testimonial providers will receive no financial compensation.

As you make these decisions, document your thought process and create your final policy. You’ll want to make it available for your marketing and compliance teams to reference as they create/review advertisements, and you’ll want it appended to your written supervisory procedures as well.

3. Update your disclosures.

Once you’ve created your policy, you’ll need to create the appropriate disclosures that will accompany testimonials in your communications. For example, if you include a reference to a third-party rating system, you’ll be required to include very specific disclosures related to the rating.

Suppose this is something your firm would consider useful. In that case, you need to outline those disclosures and maintain them in your disclosure library, so you’re not scrambling to review guidance and create something when your marketing team brings a last-minute piece announcing an industry recognition.

4. Update your ADV.

Form ADV has been updated along with the change to this rule.

You’ll need to ensure your subsequent filings correctly indicate the ways your firm is using testimonials in its marketing so that they can be properly reviewed by your examiners when the time comes.

5. Be sure you can back it up.

When loyal customers give testimonials, they tend to be positive and effusive about their experience. They may go over the top because of their nerves from being on camera or being interviewed, or they may really want to give their investment adviser a glowing recommendation.

Those glowing recommendations feel wonderful and can be wonderful when they’re sharing their experience with a friend or a family member. In an official advertising testimonial for your firm, they need to be more focused and specific.

Claims made in testimonials must be substantiated; saying things like “Raquel is the best advisor ever” is kind, but it’s not something that can be substantiated or properly disclosed.

Going the opposite way, a disclosure that states a specific earning or return rate must also be properly disclosed, as potential clients should know earnings or returns aren’t guaranteed. As the compliance professional manages these reviews, your goal should be to keep them specific and focused and show that your firm can be trusted without guaranteeing a specific level of success from an advisor or a product.

As the world continues to change and as people increasingly conduct business online, testimonial advertising does something great for consumers – it gives them a tangible connection to information about your firm/investment advisers and what they offer.

According to SEC Chairman Jay Clayton, “This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors.”

When you create testimonials, you’re increasing the amount of content available online for consumers to review as they choose whether your firm is right for them. Compliance professionals do a great service to their firm and its clients when they work diligently to keep those testimonials as clear and accessible as possible.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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