Advisors Beware: Social Media Fraught with Danger

OK, so social media is here to stay — especially as financial advisors report that social networks are a legitimate source of new business.

A survey released by Putnam Investments last year found that 56 percent of advisors gained new business from social networks and that, on average, advisors used social networks an average of 13 times a month.

So from a compliance perspective, how should advisors approach social networks?

“The overarching theme is for advisors to think about social media like any traditional advertising out there,” said GJ King, president of RIA in a Box, a company with offices in New York and Ohio that helps advisors create and launch registered investment advisories.

“It’s easy for a regulator to review your social media posts so advisors should expect to receive scrutiny,” King said in an interview with InsuranceNewsNet last week.

King, whose organization has recently posted a top-10 list of the social media guidelines, said advisors ought not be surprised if regulators scheduled to audit a firm have read every social media posting attributed to the firm.

Among the most important checklist items are saying “no” to testimonials, archiving social media posts, preventing followers from commenting, prohibiting endorsements, avoiding any misleading statements, remaining conscious of cybersecurity, developing a social media strategy plan, resisting using social media as an educational tool, King said.

Of the 10 items, the testimonial rule — Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 — is perhaps the most important, he also said.

“That can create definite compliance issues for firms,” King said. “With social media, it’s very easy for the client to retweet so you need to be very careful from a testimonial standpoint.”

An archiving system is paramount as well, he said.

Putnam’s survey found that the “typical” financial advisor using social media was 46 years old, working for a wirehouse and living in the southern or western U.S. The advisor had 11 years of experience, was active on an average of three social media networks and had a book of business worth $84 million, the survey found.

The Putnam research, conducted with Brightwork Partners LLC, found that 82 percent of women use social media for business, a higher percentage than men, and that 71 percent of women using social media for business gained clients from the platforms.

Average gains in assets among women using social media for business was $5.6 million, and the median asset gain was $1.7 million, the survey of 729 advisors found.

LinkedIn remains the top social network with 64 percent of advisors surveyed using the platform, while 36 percent of advisors surveyed said they used Facebook, according to Putnam.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].