Leveraging the SEC's New Testimonial Marketing Rule to Grow Your Financial Planning Practice: A Guide for RIAs

One of the hottest topics over the past few years in wealth advisory and financial planning circles has been the use of client testimonials and reviews. For decades, registered investment advisors (RIAs) have been prohibited from using client testimonials, stories, endorsements, and reviews in their marketing, putting them at a significant disadvantage compared with most other industries.

This disadvantage has only grown during the digital age, when the ability to generate social proof through such means is a key to achieving sustainable growth and connecting with your target audience.

In December 2020, the U.S. Securities and Exchange Commission (SEC) modernized its marketing rule under the Investment Advisers Act of 1940, marking a significant shift for registered investment advisers (RIAs). This new rule, which went into effect in May 2021, includes provisions that allow RIAs to use testimonials and endorsements in their marketing efforts, provided they adhere to specific requirements. This blog explores the nuances of the SEC's testimonial marketing rule and offers practical tips for RIAs to leverage client testimonials and case studies effectively and compliantly.

Understanding the SEC’s Testimonial Marketing Rule

The SEC's updated marketing rule replaces the previous patchwork of advertising rules with a single, comprehensive framework. One of the most notable changes is the allowance of testimonials and endorsements, which were previously prohibited. However, this new freedom comes with conditions designed to protect investors and maintain the integrity of financial advice.

Key provisions of the rule include:

• Disclosure Requirements: RIAs must disclose whether the person providing the testimonial is a client and if they were compensated for their endorsement. These disclosures ensure transparency and help potential clients evaluate the credibility and relevance of the testimonial.

•  No Untrue Statements: The rule prohibits false or misleading statements. Testimonials must be accurate and not cherry-picked to create a misleading impression.

•  Third-Party Ratings: If an RIA uses a third-party rating in their marketing, they must disclose the criteria used for the rating, who created it, and the material limitations or qualifications of the rating.

• Compliance with Performance Advertising Rules: Testimonials that include performance results must adhere to strict performance advertising standards, ensuring that the information presented is fair and balanced.

Generating Social Proof through Client Testimonials and Case Studies

With these provisions in mind, RIAs can strategically use client testimonials and case studies to build trust and demonstrate value. Here are some ways you can use these powerful methods of garnering social proof, while maintaining all-important compliance with the SEC’s marketing rule:

1. Collecting Authentic Testimonials: Encourage satisfied clients to share their experiences in their own words. Ensure they understand that their testimonials will be used in your marketing materials and that they need to disclose any material connections (e.g., if they were compensated or if they are long-term clients). Authentic, unscripted testimonials resonate more with prospective clients.

2. Detailed Case Studies: To provide a fuller, more nuanced view of the value you bring to your client relationships, consider crafting a series of detailed success stories that demonstrate how you’ve helped clients achieve their financial goals. Unless you decide to anonymize the story to protect client privacy, make sure to obtain explicit permission to use their identities. Provide a balanced view by discussing the challenges faced, the solutions implemented, and the outcomes achieved.

3. Clear and Prominent Disclosures: When using testimonials or case studies, make sure to include clear and prominent disclosures as required by the SEC. Make sure the disclosures are easy to locate on your website or on the case study itself, and ensure that all material connections and any potential biases are clearly stated.

4. Third-Party Reviews and Ratings: If you leverage third-party reviews or ratings, ensure that you provide all required disclosures. Explain the methodology behind the ratings and any limitations. This transparency helps maintain the integrity of your marketing materials and builds trust with potential clients.

5. Regular Compliance Reviews: Regularly review your marketing materials to ensure ongoing compliance with the SEC’s rules. Compliance isn’t a one-time task but an ongoing process that requires vigilance and adaptability as regulations evolve.

Note that the SEC has once again identified the Marketing Rule as an area of examination focus in 2024. Specifically, the Commission states in its 2024 Examination Priorities Report that “Particular examination focus will include:  Marketing practice assessments for whether advisers, including advisers to private funds, have: (1) adopted and implemented reasonably designed written policies and procedures to prevent violations of the Advisers Act and the rules thereunder including reforms to the Marketing Rule; (2) appropriately disclosed their marketing related information on Form ADV; and (3) maintained substantiation of their processes and other required books and records. Marketing practice reviews will also assess whether disseminated advertisements include any untrue statements of a material fact, are materially misleading, or are otherwise deceptive and, as applicable, comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements [emphasis added].”

Consult with Your Compliance Officer

Before you begin using client case studies, testimonials, reviews, and endorsements in your marketing program, be sure to consult with your compliance officer or other qualified legal experts to determine your eligibility and any special requirements needed to adhere to the SEC’s marketing rule.

The SEC's revamped testimonial marketing rule opens new doors for RIAs to market their services more effectively through client testimonials and case studies. By adhering to the rule’s requirements, financial advisors and planners can use these tools to build social proof and trust with potential clients. Always prioritize transparency and accuracy in your marketing program to not only ensure you’re meeting all regulatory requirements, but also to foster genuine, long-lasting client relationships.