Whether to publish client testimonials on your financial advisor website or social media accounts is a current debate between financial professionals and their compliance departments/regulating bodies. There is a core issue about the regulatory agencies that impact the marketing practices of financial advisors. Fee-only RIAs are regulated by the SEC. Fee-based hybrids are regulated by the SEC and FINRA.
The SEC and FINRA do not necessarily see eye to eye on regulations that have major impacts on the financial advisors and the investors that they serve.
Although they should be on the same page in regard to client testimonials they are not. Therefore, it pays to be cautious when considering the use of testimonials on websites and marketing materials.
The Validity of Testimonials
It stands to reason, no financial advisor is going to publish a bad testimonial. In fact, financial advisors will only ask their best clients to provide testimonials. So it should be no surprise when advisors roll-out multiple, very positive testimonials on their websites with disclosures or disclaimers in the fine print at the bottom of the page.
The question is do most investors know this advisor-controlled screening process exists for testimonials? Common sense says the answer should be a respectable yes. It is like watching actors on TV who are paid to endorse the products of the companies that pay them. Who is naïve enough to think they really believe the lines they are reading. Investors providing the testimonials are not paid, but they are selected because they will make positive statements. This makes it a more buyer beware world.
What About References?
References are usually real people who have been clients of financial advisors for years. They have agreed to talk to potential clients of financial advisors. So, what is the big deal? The information the references provide to prospective clients is all verbal, which opens the door to serious manipulation.
On the other hand, the information in testimonials is usually provided to prospective clients in a written format. So a major difference may be prospects can talk to references, but they cannot talk to the people who are quoted in print testimonials.
This opens the door to substantial manipulation if financial advisors convince references to make positive statements on their behalf. From an investor perspective, this could mean the information in testimonials is more reliable than statements made by references.
What About Reciprocals?
It has been a long-standing business practice for some advisors to establish reciprocal referral relationships with other professionals. For example, a CPA agrees to act as a reference for a financial advisor in return for the advisor acting as a reference for the CPA. This usually happens when financial advisors and CPAs have cross-referral relationships.
There is the potential for significant abuse when both parties, financial advisors and CPAs, benefit from the recommendations of the other party.
There is also a good chance these relationships are hidden from investors who rely on the opinions of others to make their selection decisions.
Verbal Versus Written Communications
At the end of the day, it gets down to investors trusting more of what they see and less of what they hear when they hire financial advisors or buy financial products.
This creates a major marketing challenge for financial advisors. Is written information more trustworthy than verbal information? The obvious answer is yes because there is a permanent record for written information. There is no record for verbal information.
If a testimonial is presented in a written format, then it should be more trustworthy than the information that is provided to investors by the financial advisors’ references.
What About Track Records?
At what point does a reference or testimonial become a track record? This is more likely to happen with references than testimonials. For example, an investor asks a reference what type of performance they have experienced from the financial advisor's advice and services? The investor gives an honest answer that may impress the person asking the question. At that point, the number is locked in the mind of the person asking a question. This is a track record when it represents the performance that is produced for a particular investor.
If the reference is willing to provide the information, there is a good chance the investor who is talking to the advisor’s references will consider the number to be a track record. In particular, if multiple references provide the same or similar numbers.
Financial advisors should not publish performance data in testimonials unless it is GIPS compliant and audited by an independent third party.
What Does the SEC Say?
Jay Clayton, the chairman of the SEC, says updated regulations released in December 2020, recognize how investors are using the Internet to find service providers and research financial topics.
The updated regulations will permit the use of testimonials and endorsements subject to certain conditions. It stands to reason these conditions will include disclaimers that make the testimonials and endorsements more reliable when investors compare financial firms to each other.
What Does FINRA Say?
If an investor provides a testimonial that impacts a technical aspect of investing, the investor making the statement must possess enough knowledge to provide a valid opinion of the financial advisors’ knowledge, advice, services, and results.
Any testimonials that concern the financial advisors’ advice, services, or results must make abundantly clear that what has happened in the past may not happen in the future.
Apparently, some naïve investors will assume the future will be like the past even though it should be abundantly clear no one has a crystal ball that can predict the future. Instead, every website and document that references the advisors’ results must include this type of disclaimer.
Your Compliance Department
It always pays to check with compliance experts before using testimonials in any format that is viewable by the general public. Their interpretation of the regulations and policies should dictate what you can and cannot do with references and testimonials.
It is possible the regulations are finally coming out of the dark ages that did not recognize the impact the Internet has had on the decision making of investors when they select financial advisors.
Today, investors have a way to find financial advisors and research them without giving up their anonymity. This is a major advancement compared to just a few decades ago when financial advisors controlled most of the information that investors used to screen and select them. Investors had to contact financial advisors to learn more about them. That is not true anymore.
The Internet is the catalyst for this unprecedented change. But, it is still an investor-beware world, in particular when the search engines and social media are used to promote the interests of particular firms, in particular the firms with the deepest pockets.
Paladin is a digital marketing agency that works exclusively with B2C and B2B firms in the financial service industry. Established in 2003, Paladin provides digital marketing services that accelerate the growth of financial service firms.