With the enforceability date of the SEC Marketing Rule quickly approaching (11/4/22), we’ve been asked about how the new regulations apply to users of Riskalyze, and the headline is that Riskalyze is optimized for compliance with the SEC Marketing Rule.
New regulation can feel overwhelming and even distracting, but the heart of this rule — preventing investors from being misled about the nature of future returns, and highlighting the importance of client engagement and interactivity in the process — aligns well with your charge to empower fearless investing in the world.
Overview of the Rule
The SEC Marketing Rule, now amended rule 206(4)-1 under the Investment Advisers Act of 1940, provides an overhaul and modernization of the restrictions and requirements related to advertising to investors. Many of these rules previously existed, including as less formal guidance, and the SEC has published a guide to the updated regulations here.
Generally, the use of hypothetical performance in advertising is prohibited (with the exception noted below), unless the advisor adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the advisor provides certain information underlying the hypothetical performance.
The Interactive Analysis Tool Exemption
There’s one exemption to the requirements on use of hypotheticals, and it pertains to “Interactive Analysis Tools” (the description of which may sound familiar):
“Hypothetical performance does not include: (A) An interactive analysis tool where a client or investor, or prospective client, or investor, uses the tool to produce simulations and statistical analyses that present the likelihood of various investment outcomes if certain investments are made or certain investment strategies or styles are undertaken, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices; provided that the investment adviser:
- Provides a description of the criteria and methodology used, including the investment analysis tool’s limitations and key assumptions;
- Explains that the results may vary with each use and over time;
- If applicable, describes the universe of investments considered in the analysis, explains how the tool determines which investments to select, discloses if the tool favors certain investments and, if so, explains the reason for the selectivity, and states that other investments not considered may have characteristics similar or superior to those being analyzed; and
- Discloses that the tool generates outcomes that are hypothetical in nature”
Investor interaction is at the heart of everything we build for advisors. Features like the Risk Questionnaire, Portfolio Analytics, and Check-ins serve to facilitate the investor’s communication, evaluation, and understanding of risk and reward with their advisor. As you know, investors contribute data into the Riskalyze analysis in two ways: by entering it themselves, or by providing information for the advisor to enter. The investor inputs entered into the tool fundamentally shape the outputs — you don’t get pre-determined analysis out of Riskalyze that is only customized with the client’s name. These components are critical to not only in satisfying the rule, but empowering fearless investing.
Disclosures in Riskalyze
The disclosure language required for Interactive Analysis Tools under the SEC Marketing Rule closely aligns with the pre-existing requirements of FINRA Rule 2214 for Investment Analysis Tools, and our currently available reports were designed with FINRA 2214 in mind. Of course, you are welcome to consult your own compliance resources, and/or establish custom disclaimers across your firm as well.
Once you set these up in Settings > Firm > Disclaimers, they’ll appear on all client-facing screens within the Riskalyze app and on any distributed materials, like reports and emails sent on behalf of advisors.
Don’t see a ‘Firm’ tab in your Settings? Ask your firm’s account owner to contact the Riskalyze Customer Care team [email protected] to enable firm administration for your account.
Fees in Riskalyze
So, you’re using an interactive analysis tool with clients and you’re confident in your disclosures. Another important requirement of the SEC Marketing Rule is making sure any hypothetical performance you present to clients is net of fees.
Analytics in Riskalyze are net of fees if you’ve applied those fees to your accounts. Riskalyze’s proprietary metrics (the Risk Number®, Riskalyze GPA®, Retirement Maps, etc.) have always been calculated net of fees, and a few other metrics are being updated across the app in advance of the 11/4/22 compliance date. If you haven’t set up default fees, the simplest way to do so is in Settings > Account Details > Fees. Create a new fee schedule and use the three-dot menu (•••) to set that schedule as default across accounts.
As always, we encourage you to consult with your compliance resources in all regulatory matters, but you can rest easy knowing that your growth platform is an interactive analysis tool, its disclosures are both updated and customizable, and the analytics it provides are net of the fees you enter.
Any questions? The industry’s most delightful Customer Care team would love to help at [email protected].
