How do you find a competent, ethical financial advisor?
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 United States Securities and Exchange Commission rule, getting those answers is becoming harder to do.
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.
Miss one step, and an illustration meant to clarify can become a compliance violation.
Faced with these requirements, it’s easy to see why many advisors would simply choose not to answer the question at all. The risk of leaving the client frustrated is seen as less harmful than the risk of potential disciplinary action by the SEC.
The SEC’s enforcement history explains why that caution runs so deep. In 2023 and 2024, the SEC conducted multiple sweep exams focused specifically on the Marketing Rule. These reviews were proactive, not triggered by client complaints.
In August 2023, Titan Global Capital Management was fined $850,000, largely for misleading hypothetical performance claims. In September 2024, the SEC charged nine advisory firms in another sweep, with fines totaling more than $1.2 million for Marketing Rule violations.
What’s especially important is how these cases were framed. The SEC has moved toward an outcomes-based standard for substantiation. If a firm cannot prove a claim was true at the time it was made, it can be deemed a violation, regardless of intent.
This is why my long-standing advice to ask questions and pursue straight answers now comes with another layer. Yes, keep asking. Keep having those direct conversations.
Ethical, competent advisors will still do their best to give you good advice that is in your best interest. But it may come wrapped in caution, qualifiers, and carefully chosen words. Not because your advisor is hiding something, but because, in today’s regulatory environment, even a private conversation can look a lot like an ad.
Rick Kahler, CFP, is a fee-only financial planner and financial therapist with a nationwide practice, Kahler Financial Group, based in Rapid City. His co-authored books include “Coupleship Inc.” and “The Financial Wisdom of Ebenezer Scrooge.”
The information provided is for educational purposes only and should not be construed as investment advice. The views expressed are subject to change based on market or economic conditions. Past performance is not indicative of future results. Any reference to potential benefits is illustrative and may not apply to your individual circumstances. You should consult with your financial adviser before making any investment decisions. KFG, LLC is an SEC-registered investment adviser.
Photo: New York Stock Exchange, public domain, wikimedia commons
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