Testimonials are a powerful marketing tool. They help build trust and credibility and can make people who are still on the fence feel more comfortable about working with you.

But for investment advisors, testimonials couldn’t be used in marketing materials, as the U.S. Securities and Exchange Commission prohibited them.

That changed with the SEC’s ”new” Marketing Rule, which was adopted in late 2020 and came into effect in May 2021. The updated marketing rules, among other things, provided more flexibility for registered investment advisors (RIAs) to market their firms, and that included allowing the use of testimonials.

But it’s not called a “rule” for nothing. You’ll need to take plenty into account to ensure your marketing remains above board. So if you’re considering using testimonials, here’s what you need to know.

The Modernized Marketing Rule Explained

In the past, advisors couldn’t use testimonials, endorsements, or past performance information in most marketing contexts. This was mainly to protect investors from potentially misleading claims.

However, many of the former rules predated even the internet by decades. In fact, the last time the term “advertisement” was updated prior to the “new” Marketing Rule was in 1961.

The modernized regulations take into account the way consumers find information today — largely through online reviews, word of mouth advertising and yes, testimonials.

Old rule out. New rule in. Investment advisors can now use testimonials in their marketing materials … as long as certain requirements are met.

Requirements for Using Testimonials

If you’re planning to use testimonials, here are some rules you need to keep in mind:

• No Cherry-Picking: If you’re going to ask one client for a testimonial, you have to ask all clients for testimonials. The SEC itself states in the final rule, “We do not believe that the general prohibition requires an adviser to present an equal number of negative testimonials alongside positive testimonials in an advertisement, or balance endorsements with negative statements in order to avoid giving rise to a misleading inference.” It goes on to suggest that “one approach that we believe would generally be consistent with the general prohibitions would be for an adviser to include a disclaimer that the testimonial provided was not representative, and then provide a link to, or other means of accessing (such as oral directions to go to the relevant parts of an adviser’s website), all or a representative sample of the testimonials about the adviser.” In short, you don’t necessarily have to provide representative examples of both outright, but if you don’t, you’ll need to state that outright, and direct people to somewhere they can find a representative sample.
• Disclosure: If you’re using testimonials, you are required to include clear disclosures alongside them. These disclosures need to be on the same page as the testimonial and as prominently featured as the testimonial itself. You must disclose whether the person giving the testimonial is a current client, whether they’ve been compensated (and if so, the terms of the compensation), and if any material conflict of interest exists.
• Avoid Misleading Content: While the rule allows testimonials, it still prohibits anything that could be misleading. For instance, if a testimonial mentions “guaranteed results” or makes promises about returns, you’re playing with fire. Stick to actual client feedback, and be careful with the language to avoid giving the impression of guaranteed performance.
• Record-Keeping: You’re required to keep accurate records of every testimonial used in your marketing efforts. This means keeping documentation related to the testimonial, such as the content itself and any compensation given to the client. Good record-keeping habits are a must in case the SEC conducts a compliance audit.
• Third-Party Ratings: The rule also allows the use of third-party (think Yelp or Google My Business) ratings like rankings or awards. Be aware, however, that third-party rankings are still subject to compliance oversight and should include the appropriate disclosures. The “no cherry-picking” rule applies here as well.
• Steer Clear of Entanglement: Have you deleted an unfavorable social media review, hidden a Google rating that painted you in a poor light or otherwise inserted yourself into the preparation or presentation of third-party information? That’s called entanglement, and it’s staunchly against the Marketing Rule. Leave third-party testimonials, ratings and reviews alone.

And remember: These are just some of the restrictions on, and rules around, testimonials. You’ll want to ensure you’re compliant with all aspects of the Marketing Rule’s guidelines regarding testimonials.

Testimonials: Great Power, Greater Responsibility

When people are deciding where to invest their money, they naturally look for social proof. Testimonials provide reassurance that they’re making the right choice. However, a single misstep can lead to compliance issues and client mistrust. Proceed with the utmost caution!

Do you need help hyping up your investment firm? Let Mischa Communications handle the marketing. Let’s get started.