July 18, 2013

Go Social, Stay Compliant: 3 Tips for Advisors

More On Legal & Compliance

from The Advisor's Professional Library
  • Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation.  Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.  
  • Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isn’t just a recommended best practice— it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firm’s strategy is proprietary.

Social media is a natural business tool for financial advisors. But by many accounts, financial advisors and broker-dealers are still scared to death of it.

That was abundantly clear when I (Hardeep) spoke earlier this spring on a social media panel at a regulatory industry conference. Separately, Clara’s company, Hearsay Social, often fields requests from financial services firms eager for guidance on how to use services like LinkedIn and Facebook without running afoul of industry regulations.  

It doesn’t have to be this way. Using social media smartly and compliantly is a natural progression for advisors who want to become more client-centric through increasingly personalized service. Across service-oriented industries today, brands are turning to new technologies to better target customers and offer them products and services when they need them.

For advisors, the advantages to social media are apparent. First, social media gives advisors an opportunity to better listen to their customers and deepen those relationships. An advisor connected to a client on Facebook, for instance, might see a posting about the birth of a new baby and take the opportunity (perhaps not right away—give a new Mom or Dad some breathing room!) to offer information about college savings plans. A new job announced on LinkedIn might mean it’s time to suggest a chat about stock options or a shift in retirement goals. Advisors might also use social networks to discover that they share common, nonfinancial interests or hobbies with clients. Those connections could aid in forging closer relationships.

But social media is also an outlet for advisors to initiate important conversations and establish themselves as thought leaders in their space. This way, their connections know who to turn to when they need an expert. For example, an advisor who specializes in life insurance products should regularly post educational material about the different life insurance policies to consider.

Advisors need to understand that investors are no longer getting all their financial information straight from The Wall Street Journal, Barron’s and CNBC—or from quarterly advisor check-ins.

A recent survey by Cogent Research of 4,000 investors with more than $100,000 in investable assets found that 34% of the investors used social media to search for financial advice. More to the point, the survey found that 70% of respondents started using a new advisor, or switched from an existing one, based on information from social media sites.

We understand a big catch here, of course: regulation. There are big penalties for firms and advisors that violate the rules governing issues like fiduciary duty, recommendations and record retention. But we have seen that many advisors are behaving too conservatively with social media—with some eschewing it altogether—because of vague and sometimes baseless fears about regulatory action. But that doesn’t mean you should avoid social media entirely. If you do, your current and potential new clients may find someone else more social media savvy to work with instead.

Here are three main categories of regulatory concern, and our tips for staying compliant:

Regulatory Concern, and Tip, 1: Develop Ad Policy

Advisors and their firms must have firm policies in place to govern how they address social media and how they train people to use it. Who is allowed to post content? Can they post from home networks or mobile devices? What is appropriate to post, and what is not? In the end, a firm's social media policy should be an important part of the organization’s overall operation and risk management policy.

Not only that, but the smartest firms address social media risk with the aid of technology. After establishing a policy and choosing its technology, the firm needs to educate employees so they understand how to best tap into the social networks, intelligently and compliantly. Blanket policies that prohibit advisors from posting just don’t work: those who obey will miss out on business opportunities and those who want to use social media will find ways to do so, leading to even greater regulatory risk.

Regulatory Concern, and Tip, 2: Monitor and Educate

The key, of course, is educating and supervising advisors at your firm to make sure they are not posting inappropriate content upon which regulators would frown. Social content can be considered “advertising” for regulatory purposes and must be treated as such. One option is prohibiting the use of certain terms in social-media postings, like “guaranteed”, or even “recommend” or “endorse” to make sure your group is not running afoul of Rule 206(4)-1 of the Investment Advisers Act, which includes prohibitions regarding past recommendations of securities and customer testimonials.

Social media content needs to be monitored: any discussion of fund performance that mentions elements of a fund’s return (e.g., one-, five- and 10-year performance); which promotes a fund’s returns; or communication initiated by the issuer that discusses the investment merits of the fund, needs to be preapproved by a principal of the firm.

Regulatory Concern, and Tip, 3: Keep Good Records
Not only do firms need to monitor social media activity, they are required to keep records of all business communications on the social networks. Specifically, digital communication, including tweets, Facebook postings and Instagram photos are all governed by rules that require capturing and archiving of all registered advisor communication with the public.

For advisors, going social doesn't have to be stressful. Be mindful of industry rules, but take advantage of new technologies that can help you attract and retain clients.   

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