The JOBS Act was signed into law on April 5, 2012. While the overarching goal was to provide a new source of lending in these tight credit markets and stimulate the economy to create jobs, the act has other significant consequences which will impact UHNW/HNW individuals and their relationships with their wealth managers.
Part of the JOBS Act changes the general non-solicitation ban that has been in place since 1933 under the original SEC act. Expected to go into effect around July 7, 2012, Hedge funds and other regulation 506 firms will be able to advertise their investments to the general public, however, they can only accept funds from accredited investors - mainly an individual with a net worth exceeding $1 million or earning at least $200,000 per year.
According to Dara Albright, Founder of NowStreet, a leader in financial markets’ reform, “Most industry professionals are only just beginning to realize how transformative this legislation actually is. I believe there will be a tsunami of new financial products being offered and a sea change in the types of investments that a wider and more diversified pool of investors will find appealing. As a growing supply of new emerging businesses and funds proliferate the market competing for capital, and as investing theologies evolve, more investors will rely on wealth managers to help them distinguish between a solid growth investment and a well-crafted advertisement.”
While most of America is anxiously awaiting all of the potential positive outcomes of the JOBS Act, in DC, the SEC is sweating! What measures can they put in place to be prepared for the deluge of advertising materials over every imaginable communications platform: TV, radio, social media sites, email campaigns, staged events, newsletters, etc. I expect billboards, skywriting and more. Hedge funds have been “pent-up” by their restriction to generally solicit and communicate their strategies and performance outside of those with whom they have a previous relationship. Hedge fund managers have resorted to many other kinds of more personalized “sales tactics,” including those used by the original social networker: Bernie Madoff.
Now your clients will be bombarded by carefully constructed media messages put out by smart marketing firms for their smart Wall St. hedge fund clients.
To better understand this, let’s look the changes in the advertisement of prescription drugs: First, manufacturers were only able to advertise to dispensing physicians, and then later allowed to directly market to consumers. This meant that patients who once relied on professional advice now could “diagnose themselves” and start asking for a prescription drug by name. “I can’t sleep,” patients now say. “I need Ambien.” Now, potentially, your clients will call you and bypass your advice and demand to be invested in a particular hedge fund, the advertisement of which has caught their eye.
What is a wealth manager to do? First, begin communicating now with your clients and telling them about this expected change. While UHNW/HNW individuals are certainly sophisticated, certainly there is a wide variance as to their investment savvy. Additionally, some clients are typically more “hands-off” while others are more “hands-on”. My suggestion is to use this as an opportunity for multiple “touchpoints” and engagement and conversation with clients, referral sources about the benefits/risks involved. This is a great chance to create original content on your firm’s POV surrounding this topic. Take the time and effort to think through an “offense” communications campaign around this important new topic. This topic is also an important one to engage in multi-generationally as there will be a divide between the attitudes of baby-boomers vs Gen-X/Gen-Y wealthy on this topic.
The original intention was to “protect” the public , who was deemed not to be “sophisticated” enough to understand and evaluate a hedge fund’s structure. Creating a structure to monitor firms and producing clear and actionable guidelines will certainly be a complex task. As a result, many expect the SEC to ask for an extension in order to address this issue properly.
When hedge funds, many of which have been prohibited from even having a web site, are finally allowed to advertise to the public, how might UHNW/HNW perceive their efforts? At first, UHNW/HNW individuals may be skeptical of these attempts to “lure” them. I am guessing that the efforts put into marketing by some hedge funds will be significant and impactful. There is a real opportunity on the hedge fund side to create compelling messages to drive interest in specific funds, strategies. Social media platforms and a demographic shift toward a younger wealth makes this opportunity for perfectly time and positioned for hedge funds to explode. Those firms who can effectively communicate what might be complicated strategies in a consistent, constant and distilled way will succeed.
April J. Rudin is the principal of TheRudinGroup, a marketing firm specializing in making introductions, developing content, and monetizing opportunities in the high net worth space.