How New SEC Rules Would Disorder the Internet as Advisors Know It

Two weeks ago, Justin Barish, the vice president of Digital Marketing at Dynasty Financial Partners, was reminded again that the rules governing advertisements for financial advisors are dated.

At Charles Schwab’s Impact conference, where thousands of RIAs gather to learn from and receive an annual update from the custodian, Barish encountered a wide spectrum of advisor interpretations on what ads are permitted and where. Some RIAs are running sophisticated, digital ad campaigns targeting prospective clients, like ones Barish creates for RIAs affiliated with Dynasty. Others thought that practice was illegal (it is not).

“We’ve been living for years in gray space where the rules don't necessarily mirror or aren’t written for the modern digital world, which puts advisors in a place where the rules are very much open to interpretation,” Barish said.

He was happy to hear that on Nov. 4 the Securities and Exchange Commission proposed overhauling those rules. The last time any substantial changes related to advisors and advertisements were made to the Investment Advisers Act of 1940 was 1961, the SEC states in the proposal. 

The regulator also plans to amend a separate rule pertaining to advisors and cash solicitations adopted in 1979. 

“I think, frankly, the change will democratize the digital advertising space,” Barish said. More conservative RIAs, leery of advertising without an explicit blessing by FINRA or the SEC, have been at a disadvantage, according to Barish. Clarity from regulators on ads can only help advisors.

Still, “with any rule, there are two sides to every coin,” he told RIA Intel.

It is easy to foresee some consequences of the SEC’s proposed rule in its current form. Allowing advisors to use testimonials (a practice currently illegal) would undoubtedly lead to “cheesy endorsement ads,” Wall Street Journal columnist Jason Zweig pointed out. 

The new rules will also permit advisors to use their performance and other third-party ratings in advertisements, under certain conditions. 

“We believe that consumers’ ability to seek out reviews and other information, as well as their interest in doing so, when evaluating products and services has changed since the adoption of the current rule,” the SEC says in its proposal.

Assuming the rules become reality, the prospect of RIAs using third-party ratings and reviews in ads could upend the Internet as advisors know it. There is no truly objective, comprehensive, and authoritative online guide to private wealth managers aimed at helping investors discover and choose one.

A sort of Wirecutter for advisors is probably impossible. But there might be a robust attempt at something similar. If the proposed rules go into effect, and advisors suddenly care more about ratings and reviews, companies will find a way to profit from that new market.

The new rules would also allow advisors to pay for ratings and reviews – endorsements but instead of a pop star singing their praise, it might just be simple, preferential placement amongst others by a third-party review website.

Aside from the nature of the reviews, there might be a lot more of them in the future that will inevitably alter the online landscape for advisors, big and small.

“Because of this change to the law, the way that the [search engine] algorithms work is going to change. The businesses that are ranking today may not have the top position in the future because we’re going to see such a large influx,” Barish said.

Google and other search engines prize the data stemming from online ratings and reviews and use it to rank businesses in their search results.

At least one study supports that. Among a list of factors that impact local search results, signals from Google My Business, which includes Google Reviews, were the strongest, with a weight of influence at 25.12%. Other reviews online, including their quantity, velocity and diversity, were weighted 15.44%, according to a 2018 report by Moz, a software company that enables businesses to analyze and increase the visibility of their websites in search results, and consequently drive more visitors to them.

The rise of third-party review websites is feasible, according to Barish. Older attempts at this for advisors “lacked sophistication” but some relatively new third-parties have already had success making themselves visible to the thousands of investors online looking for a local financial advisor. 

Last year, Focus Financial Partners, the serial RIA acquirer, led a $28 million fundraising round for SmartAsset, which used the money to build over 300,000 public profiles of RIAs and create a client-lead generation tool for financial advisors called SmartAdvisor. Those profiles and other SmartAsset web pages that list “top” advisors in cities across the country are the first to show up after paid advertisements.

SmartAsset did not say whether it planned to include reviews or ratings for advisors on its website but the company is well aware of the proposed changes.

“The proposed SEC rule change regarding customer reviews and testimonials for investment and financial advisors is a new development that we're keeping a close eye on. High-quality reviews of investment and financial advisors should help consumers make smarter decisions and allow financial advisors to better connect with new investors,” Michael Carvin, cofounder and CEO of SmartAsset, said in a statement.

Similar to SmartAsset, Expertise.com also ranks well for searches online for local financial advisors. Expertise.com could not be reached to comment.

Wealth managers who can modernize their business and leverage the power of the Internet have much to gain, Jud Mackrill, the chief marketing officer of Carson Group, said. Part of his responsibility is to help optimize advisors’ websites so that they are more visible online. He is also watching to see what impact the SEC’s proposed rules will have.

But, like Barish, he wonders about unintended consequences. “I do worry about people who will abuse it,” he said.

The SEC also acknowledged this in its proposal and said disclosures and other safeguards could mitigate that.

“We believe that testimonials, endorsements, and third-party ratings can be useful and important for investors when evaluating investment advisers. Yet, we recognize that there are circumstances in which this type of information might mislead investors by, for example, failing to provide important context in which the statement or rating was made,” the proposal states.

Ranking well for local searches can be meaningful for smaller firms, too. Taylor Schulte, the founder of Define Financial, a fee-only RIA based in San Diego that manages $69 million, said he’s put in a lot of effort to craft webpages and improve their appearance in search engine results. For example, Schulte’s website typically ranks high when searching Google for “financial advisor San Diego.”

That and other search terms that rank well generate about 75% of his firm’s prospects, he said. In 2017, visitors used his website to schedule about 100 phone calls with him and 14 became clients. Since then, he’s made changes to his site to reduce the number while improving the quality of the leads.

As of Wednesday, Define Financial had only eight Google Reviews. Schulte said that prospects might be using them as a way to validate his business but he didn’t think reviews alone were driving or deterring anyone. He didn’t know what level of impact a potential flood of online reviews for others would have on his business.

RIAs shouldn’t focus solely on SEO and engaging in a race to impress Google and earn a high ranking. Reviews and ratings, in whatever form, also give investors a form of “social proof” that an advisor exists and has clients that seem to be happy, according to Lee Delahoussaye, the founder and chief consultant of marketing firm Mindtap.

In the event a flood of advisor reviews and ratings reorders which advisors are visible and which ones aren’t, it could help Delahoussaye’s business. As long as changes are better for investors, he said he’s in favor of it. But in the meantime, all anyone can do is watch, wait and prepare.

“My advice would be watch. And get with your compliance people, make sure they are aware this is coming, and make sure that if it does happen, that you don't have to wait for them to digest the rule and give the clearance.”