Helping Financial Advisors With Social Media Compliance Hazards

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For financial advisors looking for the right way to address social media, the answer is easy. The answer is no--as in, no don't do it, at least not without getting preapproval for every post and tweet.

That is essentially the answer many financial advisors who are affiliated with large firms have been getting handed down to them because of concerns that social media participation could violate regulations on advertising and archiving of correspondence. Social media management firms like Socialware, Actiance, and Hearsay are trying to change that, as are message archiving players like Arkovi and Erado.

"There will be no firms that are prohibiting access five years from now," Socialware CEO Chad Bockius predicted. While today many large firms are taking a conservative posture while sorting out the implication of regulations, the opportunities of social media will eventually become too big to ignore, he said in an interview. "The industry is driven by relationships, and this is the greatest innovation anyone has ever seen for relationship management," he said.

One recent report on TheStreet.com cited research that 84% of advisor firms prohibit the use of social media, even though an increasing number of advisors are experimenting with it anyway. The challenge for investment firms is to find ways of allowing their networks of local representatives to participate in social media without violating the rules of the Financial Industry Regulatory Authority (FINRA).

Last year, FINRA issued a set of guidelines that did not so much set new rules as clarify how old ones apply to social media. For example, if an advisor has a LinkedIn profile, that's considered an advertisement and requires prior approval from the firm. If an advisor accepts an endorsement on his LinkedIn profile, that could be considered a violation of a law dating back to 1940 that prohibits such things in financial services advertising, Bockius said. So one of the things Socialware's product does is block the posting of endorsements.

Interactive content along the lines of tweets, status updates, and comments are treated a little differently under the FINRA guidance, but still must be archived at the corporate level just like email and instant messages. All this is meant to prevent investment advisors from pumping up stocks with deceptive marketing tactics, or preserving the evidence to expose those tactics if they are used.

Actiance entered the social media archiving market as an extension of similar products it had developed for instant messaging. Actiance was known as FaceTime Communications until last summer, when it agreed to sell the FaceTime brand name to Apple for use with its videoconferencing software.

"We can record that content regardless of what device or what location you posted it from," said Sarah Carter, vice president of marketing for Actiance. On Facebook, Actiance can cover both an individual's personal profile and the business page for that person's practice. While that might sound intrusive, Carter said it's necessary because the regulators are interested if anything about the personal profile makes the person "recognizable as a representative of a financial firm." However, it is possible to tag or categorize posts to avoid archiving messages of a personal rather than professional nature. Actiance customers can also set up filters to block the posting of a message, or hold it for moderation, if it includes specific keywords, she said.

Bockius said the overlap between personal and professional roles is particularly challenging on Facebook, where so many features of the platform are tied to a member's personal identity. Financial advisor firms "will tell you don't necessarily want to archive and supervise all this data, but they're required to. They're really not interested about hearing your weekend round of golf, but they are interested protecting consumers and obeying the letter of the law," he said.

Vendors are asserting this control in a couple of different ways. One is to go through application programming interfaces provided by the social media website operators. For Facebook, Actiance provides a Facebook app that prompts members to grant permission for the necessary level of access to their profiles to allow corporate control and archiving of messages. The system can't prevent the employee or representative from uninstalling the app, but it can notify the company if that happens. Socialware uses a proxy approach, where users are required to configure their browsers to reach sites like Facebook by relaying through the Socialware service so it can monitor and police their actions.

"We need to proxy because the APIs aren't complete," Bockius said. "We need to capture all the data required to be compliant."

Carter said Actiance can also function in proxy mode, although she put more emphasis on API-level integration.

Hearsay has taken a different approach, distributing recommended content that local representatives can post to their profiles, and then monitoring for compliance. Hearsay has picked up State Farm Insurance as a financial services customer, although most of State Farm's business isn't covered by the same regulations as that of financial advisors. But Hearsay is also targeting the FINRA compliance market.

Wired Advisor CEO Stephanie Sammons said her business providing social media software and coaching services to financial advisors so far caters mostly to the advisors affiliated with smaller firms, while bigger organizations continue to deliberate on strategy. "My guess is that with the bigger firms it will be quite similar to when everybody got a website," she said. The tendency will be for the result to be so conservative and bland that "advisors associated with the larger broker dealers will have a tough time being able to differentiate themselves using social media," she said.

Sammons was a certified financial planner herself and, before taking a buyout in 2009, served as a regional sales manager for Merrill Lynch.

The regulations for social media are probably out of alignment with reality, she said, "but the pendulum always swings too far one side or the other." In the wake of a financial crisis that has hurt the industry's credibility, firms are fearful and acting extra conservative to avoid liability, she said. "But I'm encouraged there will be a balance."

Carter said she sees a slow shift in attitude, as more financial organizations are beginning to at least run social media pilot projects. "The folks I speak to in compliance are not saying no anymore. They are saying, 'Tell me how I can control it, and then I'll look at saying yes.'"