Think before You Tweet

Last year this time, only a fringe crowd of the Internet population was on the microblogging Web site Twitter—many advisers might not have even heard of it. While it still only attracts a minority of Internet-using adults, the number of users grew exponentially as consumers turn more and more to the Internet and social media for conversations and information about everything from recipes to retirement.

And it’s not just young people who are spending more time on the Internet. In the last five years, the number of seniors actively using the Internet increased by more than 55%, from 11.3 million active users in November 2004 to 17.5 million in November 2009, according to Nielsen. At the beginning of last year, Facebook reported that its users over the age of 35 doubled in 60 days.

Using social networking tools (such as LinkedIn, Facebook, Twitter, and blogs) might seem like a natural extension of the financial advisory business, which is built upon reaching out to people. However, financial advisers and their firms are understandably hesitant about using it in their practices because of the regulatory risks.

When people step out into the Internet, they might forget they are part of a regulated world, said Dan Bernstein, director of professional services at MarketCounsel in Englewood, New Jersey. For advisers, the first challenge is knowing what regulatory world you are in; the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have different things to say, and state regulators  and internal compliance departments might add even more layers. While independent registered investment advisers (RIAs) might have more freedom from internal controls than advisers in the broker/dealer channel, they still have regulatory risks. Bernstein summed it up: “You need to know who’s regulating you, who’s watching you, who wants prior approval, who doesn’t.”

Both the SEC and FINRA are somewhat vague about social networking rules, letting them fall under broader rules about advertising and Internet communication. (They are obviously aware of social networking sites, as they both send news updates on Twitter.) However, last fall, FINRA said it created a task force to examine how it can welcome new forms of communication, such as social networking, while still protecting investors (see “FINRA Forms Social Networking Task Force”).

Further, last year, FINRA offered some guidance to broker/dealers and their registered representatives in a podcast series about electronic communication, and one podcast dealt specifically with using social networking, offering some generic tips (see “FINRA Guidance about Social Networking”).For RIAs, the SEC rules require a little more interpretation, noted Bernstein. The Commission has advertising rules under the Investment Advisers Act of 1940, which apply to online communication, but has not spoken to the issue of social networking specifically (see "Walking A Fine Line”). Investment advisers usually have to be more concerned about recommendations on their profile, such as the testimonial feature on LinkedIn. Meanwhile, while FINRA doesn’t outlaw testimonials, typically a broker/dealer would require prior approval anyway, Bernstein said.

The SEC would take the position that advertising is advertising regardless of the medium, said Steve Scholes, partner at the law firm McDermott Will & Emery in Chicago. The problem could arise in which a well-meaning employee of a firm does not think communication is advertising but it is seen as advertising to an SEC enforcement lawyer. Given the rapidity of Internet communication “it would be very easy to slip very unknowingly … into making communications that constitute advertising without realizing it,” he said.

Compliance concerns aren’t necessarily better or worse among different social networking platforms; they are just different, said Bernstein. Some sites, such as Twitter, do promote more spontaneous thoughts.“That sort of free and unfiltered way of communicating gives attorneys a heart attack,” said James McGovern, vice president of Consulting Services at Corporate Insight, a marketing research and consulting firm.

Of course, most of the regulatory perspective is gleaned from what experts see in existing, generic rules from which there hasn’t been enforcement action. Until there are lawsuits to shape some of the landscape, no one really knows, said Mark Hoffman, partner and chair of the Public Company and Corporate Governance Practice at DLA Piper law firm in Seattle. He pointed out that the has a lot on its plate, so considering good social media practices is “more preventative at this point.”

“The law and the regulatory environment is really behind the technology,” asserted Scholes. “So how all of this will play out … is really left to be seen.”Using Social Networking Wisely

Advisers who want to use a social networking strategy should do so thoughtfully. “It’s very rare we tell our clients ‘you can’t do something,’ but we tell them, ‘you have to do it in the right way,” said Bernstein. Here are some suggestions:

1. Be proactive, not reactive. Whether you own a firm or work for one, have a policy in place and/or know what that policy is. It is “absolutely imperative” to have a policy in place regardless of what a firm decides to do with social networking, Scholes said. Financial firms should develop policies and procedures that are specific enough to be effective but apply broadly to many social networking sites, as they are likely to continue to proliferate and change, he said.

There are a few varying approaches to the policy; one approach is to draw a big bright line and say “you cannot use social networking for anything having to do with the firm,” said Scholes. Of course, it’s not easy to draw the line between what’s a business and what’s a personal purpose, he added. Another approach would be to allow use of social networking with preapproval. However, “because these communications are so fast, pragmatically it’s very difficult to implement a policy like that,” Scholes said. A third approach would be to allow use of social networking only to clients and not in public. “All of these approaches carry regulatory approval, just in different degrees.”

Regardless of which regulatory approach they choose, firms should have an approach. That way if someone slips through the cracks, firms have an “insurance policy” to show regulators that they had proper procedures in place, Scholes emphasized.

2. Keep a record. To comply with regulators, which require that advisers keep advertisements on file for a certain period of time,sources suggest keeping a record of postings to social networking. That’s pretty easy to do with blog posts, but it could get trickier on more instantaneous services such as Twitter. Advisers can use new services that capture and save tweets, suggested Bill Winterberg, principal at fppad.com and a Dallas, Texas-based technology specialist to independent financial advisers. “I think that’s a very smart way and a proactive way to use social media,” he said.3. Separate business from personal. Another suggestion is to separate the personal persona from the business persona. That is easier said than done when sites such as Twitter have really blended those personas in our culture. However, Bernstein suggested saving weekend plans and political views for a personal profile. “You want to filter the message that you are sending out there,” he said.

Advisers could use some sites for business (such as LinkedIn) and other sites for personal (such as Facebook), or keep multiple profiles within the same service—one for business and one for personal, which still might still require disclosure to an employer.

4. Use common sense. Above all, common sense is the prevailing factor. Many advisers use social media not to deal directly with clients or make endorsements, but to post generic content. The Real Risk

The majority of advisers still seem to be holding back from social networking, and many cite compliance concerns as the reason, according to a study by consulting firm Advisors Trusted Advisor. Fifty-eight percent of surveyed financial advisers don’t use social media, at least to market their firm or find new prospects. About 18% of advisers said they use LinkedIn and much smaller numbers use Facebook (5%); blogs (4.5%); and Twitter (3%) for those purposes.

McGovern said advisers who haven’t jumped into social media still have time to figure out how to use it and watch how competitors are using it, and they should be figuring out how, and if, it fits with their business. “We’re still in the early stages of this; no firm has completely figured out the path to success as far as social media goes,” he said.

The question that remains for advisers is: What is riskier, participating in social media or ignoring the phenomenon altogether? For some, their broker/dealer will make the decision for them. For those deciding if or how to participate, it might seem daunting.

Winterberg contended that the bigger risk is not getting involved in social media, because competitors are likely to get in front of people that way. As long as advisers abide by good practice and good principles, usage can build business and increase visibility in the community. “I think the larger risk is not being visible on social networking,” said Winterberg. “It’s a tough choice, but I think advisers and registered reps can be proactive.”

Bernstein said while there’s certainly more of a risk in the compliance aspect, that shouldn’t necessarily dissuade advisers. It won’t hurt them if they don’t use social networking, he said, but “it’s a definite opportunity that some advisers should look into.” He likens it to sending out a newsletter to clients. Of course, he adds, “by next week, they’ll be three other hot commodities.”