From the March 2010 issue of Research Magazine • Subscribe!

March 1, 2010

Social Networking: Going Online Without Crossing the Line

Financial advisors work within boundaries in using social networking tools, like Facebook, Twitter and LinkedIn.

Plagued with risk management concerns, Wall Street firms have been painfully slow to build out formal social media strategies. Some have blocked access to networking websites from advisor workstations. At least one broker-dealer requires new hires to delete their LinkedIn profile as a condition of employment.

Consider this terse response to a Research magazine query from Morgan Stanley Smith Barney. It wouldn't even fill out a 140-character Tweet: "There are substantial restrictions on its use right now, but we are continuing to review the issue." At least Morgan Stanley answered the query. Others opted to remain silent.

Rapid change, lack of standards and controls, inexperience on the part of senior management and concerns over abuse all play a role in Wall Street's reaction to the explosion of social media.

As social media expert Kip Gregory, principal of The Gregory Group, puts it: "Who could blame any firm operating in a regulated industry for taking a cautious approach in the face of all that? Especially in financial services, which is at its core an industry built around the management of risk. The question is: How do you, as a competitor in this business, choose to respond to a clearly shifting landscape?"

With the Financial Industry Regulatory Authority's release in late January of its first regulatory guidance regarding the hot-button topic, the air cleared a bit. The 10-page notice, in the form of a Q&A, outlines regulatory requirements in the areas of supervision, advertisements, recordkeeping and suitability responsibilities as they relate to blogs and social networking sites such as Facebook, LinkedIn and Twitter.

In another move forward, the Insurance Marketplace Standards Association was finalizing at press time its position on recommended controls and best practices. "We're trying to rally the troops and recognize that you just can't have a policy in place that prohibits this," said John N. Travagline, vice president of compliance for the trade group. "People realize this is something that's here to stay. We've just got to figure out leading solutions -- the right way to do this."

One thing is certain. Technology is driving the trend and it is moving at warp speed. Already, start-up enterprises have emerged to help firms institute compliance-proof controls. Austin-based Socialware offers a techno-solution called Risk Manager, which gives companies the ability to turn on or turn off any part of Facebook, LinkedIn or Twitter. As examples, Socialware can disable the function that accepts LinkedIn recommendations on a profile or it can route a Twitter post to a registered principal for content review. Then, the principal simply presses "approve" or "reject." If approved, the Tweet posts on behalf of the user and leaves a tidy audit trail to ensure compliance.

"The primary risk is being out of compliance, but there's also brand and reputation protection," notes Chris Richter, founder and CEO. "And unlike e-mail or instant messaging, which are very structured and standardized, social networks are not. They change frequently. When they change, social middleware responds. Up until now, there's not been any option other than to lock it all or open it all."

Another firm, Miami-based linkedFA, offers a social networking site that allows advisors to communicate with clients, create blogs and share documents and videos, among other features. It also has a compliance element that captures and stores content for six years. Co-founder and CEO Brian Byrne calls linkedFA a "purpose-driven" social network. In the works: a mobile phone application.

It is unlikely that there will be a uniform or universal fix to the regulatory challenges that social media present. Even FINRA in Regulatory Notice 10-06 urges firms to develop their own policies and procedures and to supervise the use of social networking sites in a way that befits their particular business model.

As Todd Estabrook, chief marketing officer for Commonwealth Financial, observes: "We view social media as an evolving technology and an evolving media. The regulations are clearly also evolving. It would be nice to say 'Ok, we have a social media strategy and here it is.' But that's not the way this story is being played out."

A 'Game Changer'

Not surprisingly, advisors are using social media to communicate their value to clients and prospects. But experts say the really savvy folks are employing it for something more powerful: intelligence gathering.

Gregory calls it a "listening opportunity." Sam Richter, chief marketing officer of ActiFi, a business consulting firm in Minneapolis that provides custom software to financial services firms, calls it "relationship intelligence." Both say it's a game changer that, done well, could transform the way advisors seek referrals.

"Let's be realistic. How many high-net-worth individuals are going to go on Twitter to find an advisor? Or on Facebook to find one? It's just not going to happen," says Richter [no relation to Chris Richter.] "But LinkedIn is everything a financial advisor ever dreamed of. It automates this whole six degrees of separation thing and brings the world down to two degrees of separation. Best yet, nothing on the intelligence-gathering side has anything to do with compliance."

Using LinkedIn, an advisor can uncover a person's work history and interests, a company's organizational structure and the names of, say, heart surgeons or CEOs in a particular zip code along with a listing of who in the advisor's own LinkedIn network might have a connection to them.

"It's jaw-dropping what you can get at without even poking your head above the radar screen," says Gregory. "This stuff is worth its weight in gold."

Advisors remain in the early stages of adoption. As Eric Daugherty, research director for kasina, a consulting firm in New York City, puts it: "They've been late to the party." That could be changing. In a kasina study last fall, about 48 percent and 43 percent of advisors reported visiting LinkedIn and Facebook, respectively. While usage among advisors was not universal, the study concluded that "a wave of adoption is on the horizon."

In a brand new study, "The Asset Manager's Guide to Social Media," 100 percent of the 48 firms surveyed thought social media was here to stay and 84 percent thought it would have a lasting impact on financial services.

Still, it's going to take time for financial services firms to articulate clearly what their social media strategies are. Meanwhile, how can advisors use this new firepower to best advantage? First, a cautionary note. Treat everything you write online as though it had been vetted by compliance.

As Sam Richter puts it: Use The Wall Street Journal rule. "This goes to the heart of reputation management. Ask yourself before you hit 'save:' If this shows up as a headline in The Wall Street Journal tomorrow, would I be embarrassed?" he says. "If you want to rant about the war in Afghanistan or health care, post it to yourself in an e-mail."

Also, don't reinvent the wheel. Most firms have marketing departments with lots of compliance-approved materials that advisors can post online. "Most of it withers on the vine," says Gregory. "It's good content that's not well publicized or promoted."

When creating a profile, use compliance-vetted content such as the information that already appears in the "About Us" tab on your website. It's OK to include material about personal interests, but never accept endorsements about your work or give investment advice. "No advisor should ever accept a recommendation of any kind," says Richter. Remember, too, that your LinkedIn profile is often one of the first items that appears when a prospect or client googles you.

Also, it's fine to share some personal feelings. "From time to time, it's OK to bring up personal things that make people feel connected to you, just don't overdo it," notes Ivan Misner, founder of Los Angeles-based BNI, the world's largest face to face business networking organization. "Integrating personal stuff into business content is advisable. Otherwise, it becomes a very sterile place. Networking is all about farming, not hunting. It's about cultivating relationships."

Finally, Gregory says advisors need to keep their social media tools current. Too often, he adds, people accept an invitation to join LinkedIn, create a minimal profile and "it lies there inert." At conferences, Gregory routinely asks advisors how many have profiles on LinkedIn. Typically, half the hands in the room will go up. When he asks how many are active users, 80 to 90 percent of the hands come down.

---

Kirk Michie

Printed out, Kirk Michie's LinkedIn profile is eight pages long. It tells you what he's reading [The Education of an Accidental CEO]; whether and where he's traveling [at home in Solana Beach, Calif., this week]; and what he's thinking [through links to his blog and Twitter account.]

Director of deal development at Triton Pacific Capital Partners, a private equity investment group, the 47-year-old Michie was an early adopter of social media -- using it as a referral engine as well as for intelligence gathering.

He's used LinkedIn in particular to find people to work for him and to establish third-party relationships. "It's a way to let the world know who you are," he says. "If that's attractive to people, they reach out to you."

For Michie, it's also a two-way street. He has close to 1,000 connections on LinkedIn and he knows 700 to 800 of them personally. "I have 5,600 contacts in my Outlook database. I've traded business cards with people for the last 26 years." He doesn't turn down invitations on LinkedIn to connect, but if he doesn't know the person, he typically replies: How do you see us helping one another?

A member of the Financial Advisor Board of Tiburon Strategic Advisors, Michie is often approached on LinkedIn by people early in their careers who want to get into private equity and wealth management. He routinely sets them up with people in his network.

"Probably the best firm I worked for was Sanford Bernstein and a guy there was, without question, the smartest sales management guy I've ever worked for. He said basically: 'Collectively, we're all a lot smarter than we are individually -- if we're willing to work collectively.' That's the role social media can play if you let it."

---

Scott Dauenhauer

Fee-only advisor Scott Dauenhauer, who heads Meridian Wealth Management in Murrieta, Calif., used to write a monthly client letter -- dutifully printing it out and mailing it to his contacts.

"It was such a pain. It was expensive. And by the time it got to them it was out of date," says Dauenhauer, 35. "I hated doing it."

In 2005, he started blogging instead -- writing articles or linking to others he deemed newsworthy. Once a month, he includes a "humor break." One recent video featured The Daily Show's Jon Stewart's riff on Wall Street bonuses. Another Dauenhauer staple is his "Hall of Idiots." Inductees include Jim Kramer and "Rich Dad Poor Dad" author Robert Kiyosaki.

"The blog is a great communications tool. I'm constantly in front of my clients," says Dauenhauer, whose financial planning and investment management business has $35 million in assets under management. "They have a way to constantly see what I'm thinking and as a result they kind of know what goes into my thought process for the investment decisions I'm making on their behalf."

Meanwhile, Dauenhauer is using LinkedIn to help build up a new institutional consulting business, Meridian Fiduciary Consulting. "The networking aspect is powerful," he says -- potentially creating an "open door" to people he might want to get to know. He also belongs to eight LinkedIn groups involved with fiduciary issues that have helped him keep current.

As for Facebook, that's a venue he reserves for personal friends. "I try to separate politics from my client space. I tend to be a little more political on Facebook. I'm not trying to hide anything," he says. "I just don't want to insult my clients if they disagree."

Reprints Discuss this story
This is where the comments go.