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News January 24, 2005 Issue

Advisers May Make ‘Satisfaction Guaranteed or Your Money Back’ Marketing Claims, Says SEC Staff

Satisfaction guaranteed or your money back. Itís a tried and true marketing technique that can now be tried by investment advisers.

In a recent no-action letter, the SEC staff told a group of three affiliated advisory firms that they may promise potential clients that if they arenít satisfied with their adviserís performance or service ó or just plain arenít happy with the way things are going ó they can get a full refund of their advisory fees paid over the first twelve months of their relationship with the firm. In other words, "Satisfaction Guaranteed, or Your Money Back!"

In a December 6 letter, which was not released until earlier this month due to a confidentiality request, the staff of the SECís Division of Investment Management told advisory firms Trainer, Wortham & Company, Froley, Revy Investment Company, and Starbuck, Tisdale & Associates, each a subsidiary of First Republic Bank, that it would not recommend enforcement action under Advisers Act Section 205(a)(1) if the advisers offered the satisfaction guarantee.

Why was the relief necessary? The staff took the view that the guarantee was equivalent to a contingent fee, since the guarantee would make the advisersí receipt of fees at least partly contingent on performance (a client could obtain a refund due to the unsatisfactory performance of its account, among other things). The SEC has taken the position that Section 205(a)(1)ís prohibition of on performance fees in investment advisory contracts also prohibits contingent fees.

Nonetheless, the staff granted the relief, noting that the guarantee would not refer to any specific, agreed-upon level of performance that must be achieved in order for the adviser to receive a fee. The staff also said that policy considerations supported the relief, noting that a satisfaction guarantee "could serve to encourage the advisers to develop a strong culture of client service and responsiveness."

As proposed, the guarantee would allow dissatisfied clients to receive a full refund of all advisory fees paid to the adviser within the first twelve months of establishing their advisory accounts. The guarantee, explained the letter, would allow clients to obtain a refund of advisory fees for any reason, "including unhappiness with the advisers, unhappiness with the advisersí investment performance, or dissatisfaction with the advisersí responsiveness or the quality of service provided by the advisers." The refunds would be granted without condition or obligation.

Not all of the advisersí clients would be eligible for the guarantee. For example, existing clients would not be eligible, nor would clients that came in through certain channels (such as via third-party solicitors or through a wrap program in which the adviser served as a manager). The advisers also reserved the right not to offer the guarantee to certain types of clients, such as pensions and IRAs. However, they promised that all similarly-situated new clients who met the programís criteria would be offered the guarantee.

The advisers represented that the guarantee would be disclosed in the written advisory contracts of participating clients, as well as in the Part II fee schedule and any brochure in lieu of Part II. Prospective clients might be presented with a printed description of the proposed satisfaction guarantee during face-to-face meetings, or as part of a direct mail campaign, said the advisers. The disclosure would describe the terms of the fee refund, the categories of clients that are entitled to the guarantee, and the fact that the guarantee would permit the client to demand a refund of advisory fees for any reason.

The advisers represented that any clients who received a return of advisory fees under the satisfaction guarantee would either terminate their accounts or remove a substantial portion of their assets from the accounts. That, said the advisers, would be a condition to the receipt of refunded fees, although the condition could be waived if the adviser was clearly at fault (but still was able to retain the clientís business). A waiver would not be made, however, where the client simply was not satisfied with investment performance.

The staff said its relief was based particularly on the following representations:

  • Participating clients would be entitled to a refund of their advisory fees for any reason.
  • The advisers would not have any explicit or tacit understandings or agreements with the participating clients regarding a maximum, minimum, or other target level of investment performance for the clients' accounts. 
  • The satisfaction guarantee would be available only for the first twelve months of the advisory relationship.

The staff declined to address the question of whether the satisfaction guarantee promotion ran afoul of the provision of the Advisers Act advertising rule that prohibits advisers from advertising that an advisory service is free, unless it is, in fact, free. The staff also noted that it did not address the advisers' fiduciary obligation to deal fairly with their clients and to manage their accounts in a manner that does not discriminate in favor of the clients that participate in the proposed satisfaction guarantee at the expense of other clients.

The firms asked for confidential treatment for 120 days, describing the satisfaction guarantee as "a confidential business plan." The staff, however, granted confidential treatment only for thirty days from the date of the staffís response.