Beware the “We’re #1” Trap

Michael Kitces recently posted an article about a proposed publication that would provide client reviews of their financial advisors. For those of you who do not follow Michael, you should do so. Michael is recognized as an industry leader. I have turned to Michael on occasion for information, as I know I can trust him to be honest and objective.

Michael and I exchanged some emails regarding the post, as I was concerned that such a publication could result in some investment advisors inadvertently violating the Investment Advisers Act’s (“Act”) prohibition against the use of testimonials.  As a former RIA compliance director and present consultant to RIAs, I hate to see them get mired in unnecessary regulatory hassles due to a lack of information.

All advisers want favorable publicity, but these so-called “best of the best” lists raise a number of potential problems. “Barron’s” publishes a number of these lists. “Barron’s” disclosure that only those advisors who pay a fee are eligible for inclusion on their lists raises a number of issues for advisors named to such lists.  The omission of industry leaders such as Harold Evensky, Ross Levin and Louis Stanasolovich speaks volumes to investment and financial planning professionals, but not so to the readers of “Barron’s” who might rely on such lists in choosing a financial adviser.
The SEC has addressed the issue of third-party rating and has stated that the term “testimonial” includes

a statement of  a client’s experience with, or endorsement of, an investment adviser.   A third-party rating would be a testimonial if it is an implicit statement of a client’s or client’s experience with an investment adviser of investment advisory representative… A third-party rating that relies primarily on client evaluations of an investment adviser would be a testimonial.(1)

Advisors considering using a third-party rating in their marketing program should carefully review the SEC’s so-called Dalbar no-action letter.(2) The no-action letter discusses several factors that advisers must consider in order to avoid having an advertisement referencing a third-party rating deemed to be false and misleading, and therefore a violation of Section 206(4) of the Act and Rule 206(4)-1(a)(5) thereunder.

The Act and the rules created thereunder all stress one point – full disclosure of all material facts to clients. An advisor simply cannot say that they are a “Barron’s Advisor” of that they are a “Top 100 Advisor” without making the disclosures required by the Dalbar no-action letter.

Advisors who decide to ignore the Dalbar no-action letter and claim ignorance if caught are reminded that ignorance of the law is no defense and intent is not a requirement for violation of the Act (or similar state securities laws). The Act’s expressed intent is to protect the public…period. And CFP(r) professionals should remember that violation of securities laws, federal or state can be grounds for a disciplinary action by the CFP Board of Standards.

And yes, one of the requirements set forth in the Dalbar no-action letter is whether an adviser’s advertisement discloses that investment advisers paid a fee to participate in the survey. And yes, I have already seen adviser advertisement referencing third-party rating that are not Dalbar compliant, but none of them is one of my clients.


1. Investment Adviser Association No-Action Letter (12-2-2005). Dalbar, Inc. No-Action Letter 3-24-1998),

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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