The Reviews Are In
The Investment Advisers Act of 1940, the federal law regulating financial advisors, did not anticipate the development of LinkedIn, Twitter and Yelp.Consequently, their presence has been largely ignored by financial-service regulatory agencies—until now. The SEC recently tiptoed into the 21st century when it ruled that financial advisors and money managers could begin promoting investor reviews that appear on social networks and third-party websites.
Investors have had the ability to post and review advisor-related comments on websites, such as Yelp, for as long as those sites have been in existence—that’s their First Amendment right. (If they were put up to it by the advisor, however, that could land the advisor in hot water with the SEC.) What was missing was the advisors’ ability to integrate positive posts, called testimonials, into their marketing. The SEC has now green-lighted that, with the caveat that advisors can’t edit out the negative parts.
The importance of reviews and ratings will inevitably increase as financial advisors begin using them to support their marketing efforts. A recent Corporate Insight survey showed 67 percent of millennials said they would use online search tools to find, review and select advisors, while 28 percent of baby boomers said they would use the online tools. I expect Generation X is somewhere in between Generation Y and boomers. Those percentages are likely to increase.
But when you choose a financial advisor who will influence or control the investment of your assets, should online reviews really be a factor?
Better Than a Reference?
In one sense, financial advisors have always depended on reviews—they acquire new business either through word of mouth or by using references. But references are notoriously unreliable; no advisor is going to send you to a bad reference. Less ethical advisors may use similar tactics to manipulate online reviews, encouraging friends and family to post positive comments and ratings, or even, as often happens on Amazon and iTunes, hiring people to write fake reviews—perhaps even fake critical reviews of competing advisors. The SEC prohibits the manipulation of reviews and ratings, but it has no way to enforce its regulations. So how can you know if an online review is credible?
Consider the Source
First, consider the source. Did the advisor provide a link to the review? It’s a safe bet that advisors aren’t going to link to negative reviews, so you’re better off if you find reviews on third-party websites such as Yelp, FindTheBest, U.S. News and Facebook.
Consider Human Nature
Chances are you’re more likely to find negative reviews online than positive ones. That’s because happy clients tend to take positive experiences for granted; there’s nothing special about an advisor who meets expectations. But investors who’ve had bad experiences may write reviews to warn other investors. At the same time, remember that critical reviews may not be representative of most clients’ experiences with an advisor. So if you read an unflattering review that’s affecting your evaluation of an advisor, take the logical next step: Bearing in mind that the advisor may be legally limited in what he can disclose, ask him or her to explain what happened.
What About the Content?
How can you judge if reviews are a) real and b) valuable? Well, if they sound fake, they probably are. Their value depends on their specificity and applicability to your situation. But the SEC made the right decision here: The more information, and the more transparency, investors can access, the better their choices will be.