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How do you find a competent, ethical financial advisor? An approach I have recommended for years is to interview planners, ask questions, and persist until you get clear answers. Under a relatively new SEC rule, getting those answers is becoming more difficult.
This shift comes from the SEC’s updated Marketing Rule, which took full effect in late 2022 and is now being actively enforced as a high-priority concern. The words your advisor chooses in a one-on-one conversation may need to be documented, reviewed, and carefully parsed – often resulting in language that’s more cautious and vague than you would like.
The intent of the rule is to protect clients, and the principles behind it are sensible. Communications must not be misleading. Claims must be substantiated. Information must be fair and balanced. Investor protection matters.
The surprise is how broadly the SEC now defines advertising. Under the Marketing Rule, websites, social media posts, emails, presentations, and many other communications can be considered advertisements. Even a one-on-one communication may be treated as an advertisement if it includes hypothetical performance, a paid testimonial or endorsement, or material that the advisor uses over and over in meetings with different clients. In those cases, the same rules apply as if the message appeared on a public website.
Imagine that you, as a client, ask your advisor a straightforward question: “Can you show me how this strategy might have performed in the past?”
Previously, an advisor might have walked through a hypothetical or backtested example, explaining assumptions and risks in plain English. Today, hypothetical performance is one of the SEC’s biggest enforcement hot buttons. Even an example shared with a single client can trigger violations unless strict conditions are met.
Those conditions go far beyond a verbal disclaimer. Firms must:
- Be able to show they reasonably believed the hypothetical performance was appropriate for that client.
- Disclose every material assumption used in the calculation.
- Explain the inherent limitations of hypothetical results.
- Maintain written records showing exactly how the figures were generated and reviewed.
- Spell out in compliance manuals who is allowed to receive such information and under what circumstances.
