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Social Media Can Bring Higher Revenues, but Compliance Is Tricky

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Use of social media has made the leap from the personal to the business world, including financial services. While financial advisors may embrace social media in their off hours, they find it challenging to employ in their work, whether for prospecting, keeping in touch or commenting on issues and trends in the industry. That’s mainly because guidelines governing such use in the heavily regulated financial industry are complicated and occasionally unclear.

The latest Rydex|SGI AdvisorBenchmarking report indicated that while a sizeable number of advisors surveyed plan to use social media, and recognize the value of these tools in keeping and finding clients, the overwhelming majority do not, mostly because they are unsure how to navigate the compliance issues. Survey after survey confirms that advisors want to use social media such as Facebook, Twitter or LinkedIn, if only to demonstrate to clients or prospects that they are savvy and adaptive. Many advisors believe it also differentiates them from competitors.

Several industry surveys suggest that social media use and business success may be correlated. For example, a recent survey from the Aite Group showed that advisors using social media have higher revenue growth and larger client bases. Age also plays a part in social media use. A recent LederMark Survey said that more than 40% of under-30 financial services professionals believe that using social media has helped them do business, while only 19% over age 50 say it has.

Guidelines for social media use do exist, derived from rules on the books regarding suitability, advertising and interactive communication. Generally, firms need to retain all business communications, including those conducted through social media, and any recommendation made through social media must be suitable for every investor receiving it. Static content is deemed advertising and needs pre-approval, unlike real-time interactive communication, which is not advertising but still requires supervision. It’s not easy to categorize social media, however, which means an advisor might be able to post static content and interact on the same site. Moreover, third-party or client comments about an advisor on sites don’t need to be reviewed or captured, unless the advisor was involved creating them or gave the okay to post them.

As an example of how complicated rulemaking can be, FINRA issued the guidelines outlined above in 2010, but due to many questions regarding interpretation, will revisit the rules and firms’ view of them in March 2011. Also, the SEC this year began its own survey into how firms use social media and retain records.

So with the requirements still under development, it’s no wonder that many industry players are hesitant to jump into social media with both feet. The regulatory burdens are huge and expensive. Many broker/dealer (B/D) firms simply prohibit the use of social media or heavily restrict it. One large B/D said it already monitors and retains 10 million emails a month, but that with social media, the number of messages could increase by 10 times. Still other B/D firms report experimenting at the corporate level with Tweets, or permit one-way blogging.

Independent advisors face many of the same issues. Social media use is not extensive. But RIAs who use social media report that it helps them reach new prospects or generate awareness of their business. Some RIAs have taken advantage of third-party services that claim to enable the advisor to meet the record-retention requirements.

For many financial services professionals, LinkedIn is the most common way to start using social media. A static LinkedIn listing is easy to set up. That’s probably why it was the social media marketing method RIAs planned to use most in the recent AdvisorBenchmarking report. Twenty-eight percent of RIAs indicated a plan to use LinkedIn, versus 23% for Facebook, 8% for Twitter postings and 15% for blogs. Advisors planning to use LinkedIn to dip their toe in the social media waters should make sure that their personal and professional profiles are distinct, and probably refrain from using LinkedIn to send and receive messages.

Social media are powerful tools, and are most effective with a good set of guidelines and careful use. Advisors at the very least may want to consider registering for a basic service that describes their background and credentials and can help initiate relationships. Those seeking more compelling ways to engage clients, establish a reputation and enhance their visibility will incorporate other social media, such as blogging or tweeting, into an effective marketing communications plan.




Rydex|SGI AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. Study results quoted in this article are based on the 427 RIA firms that took the online survey in March-May 2010. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors. Advisors also learn best practices of the most successful advisors in the business.

AdvisorBenchmarking is an affiliate of Rydex|SGI. The analysis on Rydex|SGI is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general in nature, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Rydex|SGI or any of its affiliates.