Individual investors may begin to see something they have never seen before from financial advisors: testimonials from an advisors’ clients. As remarkable as this is, before December of 2020, it was not allowed by the financial regulators for an advisor to use a client’s recommendation in any marketing material.
The Securities and Exchange Commission (SEC) updated a rule written in 1940 to finally allow testimonials, bringing advisor marketing into the 21st century and allowing advisors to market themselves in the same manner as virtually every other profession and industry.
This rule change is obviously very good for advisors, but it is also very good for investors as according to the SEC it will help improve the quality of information available to investors. Hearing the real-world feedback from a current client of an advisor can better communicate the benefit of an advisor to potential clients.
However, like all marketing, it is very important to understand what exactly you are seeing and hearing in these testimonials. Here are some tips to get real information and not be swayed by simple promotion:
Look for Specifics
When reading, hearing or seeing a client speak positively about their advisor, be on the lookout for exactly why the investor likes the advisor. “Joe is very professional, and a great communicator” is good to know, however it is very important to understand what Joe does exactly for his client. Did he create a financial plan outlining when the client could reasonably be expected to retire, taking into account a specific monthly savings level? Or does Joe focus exclusively on managing an investment portfolio of Exchange Traded Funds, and does not create retirement plans? If details are absent, make sure you ask questions. It can be very easy to stop asking questions when someone is waxing poetic on the virtues of a professional.
Don’t Stop Your Diligence
Always do a background check on your advisor-even before you google them. There are two free government websites where you will find background on your advisor. Finra and the SEC will show the employment history of your new potential advisor and any negative history. If you do not find this potential advisor on either site, this is a huge red flag as all advisors are in one of these databases. Once you find the advisor, if there are complaints, fines, or regulator actions disclosed about the advisor, read them carefully and ask the advisor about them.
Birds of a Feather
When you see a video or photo of an advisors’ client, do not assume the person is highly representative of the advisor’s client base. They may look just like you, or perhaps not, but you want to ask the advisor how many clients they have just like you. The most productive investor-advisor relationships are with advisors that have many clients just like you. You want to make sure the advisor has clients that are similar to your assets, income, life stage, age, and as many other criteria as possible. An advisor that has a deep understanding of clients like you will generally be better equipped to help you achieve your financial goals.
Advisor testimonials are an excellent advancement in the advice industry, and by understanding how to best utilize them you will be more prepared to find your ideal financial advisor.
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