Selling Steak Not Sizzle | Marketing Your Exempt Product Business
By Stephanie A. McManus LL. B.
It seems to me that one of the most important things a Dealing Representative selling in the Exempt Market can learn and apply in day-to-day practice, is the notion that he/she is there not to sell a product - but to provide a service.
Too often, we review websites, read client communications, brochures, articles or other marketing material that tout products in the Exempt Market - how wonderful they are and how much better they are than those nasty volatile stocks on the TSX or those mutual funds being battered by stock instability.
The focus always seems to be on product, product, product, and of course on the advantages of the Exempt Market over traditional investing.
The dangers with this approach are:
A) You’re not focusing on knowing the client; you’re focusing on selling a product;
B) When you advertise on the basis of the products you offer, you could change or misinterpret the information provided by the issuers, which was reviewed and approved in the due diligence process by your dealer;
C) When you promote the Exempt Market as somehow “better” than the traditional markets, you run the risk of glossing over or ignoring the very real risks it entails.
Know Your Client
The whole regulatory structure around the retail sale of investments is based on one notion: “Know Your Client”, You will notice that is very different from “Sell Products”. In fact, if done properly, the exercise should sometimes end with no product sale at all because in getting to know your client, you learned there is no product you can offer that is suitable for them.
I recognize that this is not an intuitive line of thinking for many professionals who earn their living in this role. But it is what the regulators expect. When they review your work at audit time, it is what they will look for as evidence in your client files. And for you dealers out there, supervision and training processes should be ensuring that this is what’s happening.
It is a client first mentality that requires you to a) know your client, b) know your products, c) if possible, design a match between the two and d) disclose all the downsides, as well as the upsides, of the investment.
Services vs. Products
“We offer safe, simple exempt products with high returns.” We have seen this and many other similar claims made in marketing materials or on websites for Dealing Representatives. The fundamental underlying principle for every marketing piece you ever create has to be “ Do not mislead the public.”
Subsection 100 (2) of the Alberta Securities Act, contains a provision, very similar to provisions contained in every other Securities Act:
“A person or company shall not make a statement about something that a reasonable investor would consider important in deciding whether to enter into or maintain a trading or advising relationship with the person or company if the statement is untrue or omits information necessary to prevent the statement from being false or misleading in the circumstances in which it is made.”
- Can you say with 100% accuracy that every product you offer is “safe”?
- Can you say with 100% accuracy that every product you offer is “simple”?
- Can you say with 100% accuracy that every product you offer guarantees “high returns”?
The answer to all three of those questions is of course, “no.” And so, what seemed initially to be a harmless promotional tag line has turned out to be a violation of regulatory marketing rules.
Exempt Market v. Public Markets
You believe in the Exempt Market, otherwise you would not be working in it, right? You genuinely feel that it offers an alternative to investors that the public markets just cannot offer. There is nothing wrong with believing in your work. When you are a Registrant though, there is a problem with promoting the good without disclosing the bad. Yes, the Exempt Market offers less volatility, because its products are not traded daily. All that means is those investors who do not have the stomach for daily jumps and drops can avoid that one aspect of investing when they buy in this less visible market. However, that does NOT mean that the products are less risky. Exempt products are private products with a whole host of risk factors unique to them, which is why they are largely reserved for more sophisticated, “eligible” or “accredited” investors. It is misleading and contrary to regulatory marketing rules to “leave out” the downsides of investing in the Exempt Market when you promote it in your marketing materials.
There are two things you can do to help ensure you are remaining on the right side of the regulators with marketing. First, focus on what you offer as a service.
Pretend you are up against another Dealing Representative in the same Exempt Market with the same products available: what is it that you offer that adds value and would make an investor want to work with you as opposed to that competitor?
Second, everything you ever propose to unleash onto the public – bulk communications, newspaper or magazine articles, websites, brochures, cold calling scripts, etc. - must be submitted to your dealer compliance department for review and approval. They have a duty to supervise what you do, whether you like it or not, and you can benefit from their trained eye in reviewing these things to ensure you are not off-side.
Marketing is an important tool in the growth of your business. Just remember to tread carefully and use the compliance expertise you have available to be sure it promotes, rather than harms, your business.