Published Articles

Wirehouses 'Winging It' on Facebook, Twitter.

SuperUser Account posted on February 25, 2011

Wirehouses ‘Winging It’ on Facebook, Twitter

Article published on January 27, 2010 
By Tom Stabile    

Most top wealth management firms, and particularly the wirehouses, are way behind the curve in terms of establishing workable policies for advisors and other staffers to log on to social networking sites such as Facebook and Twitter in order to communicate with and serve clients. And this slowness in adopting social networking tools could harm business in the long run, says a new report from Novarica, a New York-based consulting firm.

“On one hand, they can’t ignore the phenomenon; on the other, they can’t invest substantial resources without knowing how they will make money from it,” states the report, “Best Practices in Social Networking for Wealth Management Firms,” which is available by clicking here.

The report says that to date, social networking and wealth management have “collided” more than “intersected,” largely from concerns over regulatory compliance. But it also projects that these modern communications tools will be increasingly used in wealth management, and will become critical to connect with younger investors. It also says there will be exceptions in “advisor-centric” firms that use no social media at all.

The report defines social media broadly to include networking sites such as LinkedIn, Facebook and MySpace; blogs, which are “streaming” commentary sites, often allowing reader comments; Twitter, which is almost a mix of networking and “micro-blogging” of short updates and commentary; and even text messaging.

The variation of even these popular services, and their external-hosting formats, make them “hard to control” in terms of monitoring communications or storing information. But firms would be wise to develop strategies now, even if they’re late to the party, says Robert Ellis, principal and head of wealth management at Novarica, and author of the report.

“I think advisors and firms would be foolish to ignore all aspects of social networking,” he adds. “For instance, blogging could be useful, as long as it’s properly managed by compliance.”

For now, most wealth management firms are “winging it,” the report says. “Some allow reps and advisors to use these tools; more do not,” it states. “Some allow them only on company-maintained networks; others allow their employees to dive into the brave new world of Twitter, Facebook, and their ilk.”

The wirehouses aren’t warm to these sites, says Rick Rummage, a former wirehouse advisor and branch manager and now managing partner of the Rummage Group and Global Recruiters Network, a recruiting outfit.

“Most of the wirehouses have the Web sites blocked,” Rummage says. “The bigger they get, the more conservative they are, and the more fear of lawsuits.”

But Rummage says he would like to see a study of the cost of “playing it safe” versus giving advisors more freedom. “If the lawsuits cost $5 million a year, but there was an additional $30 million in revenue from it, wouldn’t that make a difference?” he asks.

Ellis says while big advisory firms are off the pace, online brokerages are closer, particularly TradeKing, which has built social networking into much of its operation. He says that has generated benefits for the firm in terms of sparking trading activity and cutting down on customer service costs.

Rummage says even if social networking doesn’t become the primary way an advisor adds clients, it could provide a foundation for prospective clients to review credentials, which is important because some wirehouses don’t even allow advisors to list their own backgrounds on company Web sites. “It might make advisors more credible after that first call,” he adds.

Other outfits are already pitching social networking as a core business development medium, including Atlanta-based RidgeWorth Investments, which is running webinar programs, along with consultant Kip Gregory, to help advisors use social media for marketing to current and prospective clients.

Such tools might also become useful for routine client communications, offering more rapid response to client requests, Ellis says.

Ellis says the inability to connect with younger, more technology-savvy investors will become a big issue in the future. “It’s rife with all kinds of problems for advisors to maintain relationships with clients,” he adds. “A lot of people will feel their advisors are out of touch.”

Social networking, if used strategically, can also help the firms themselves quickly test new concepts in the marketplace, establish brand profiles, and build customer loyalty, Novarica’s report states.

Ensuring regulatory compliance is the main reason firms have avoided social media, and such concerns are valid, Ellis says. A critical concept is proper tracking and storage of documentation and client communications through third-party hosted sites. Technology to allow wealth managers to capture such data is still in its infancy.

Another concern is ensuring that broad-blast social networking tools don’t lead advisors to recommend investments that aren’t suitable for all investors or make marketing statements that violate regulatory rules. Ellis says even having a blog where commenters laud the advisor’s portfolio management prowess could conceivably violate rules governing client testimonials.

And then there are privacy concerns: What if a commenter hoping to make a point posts his or her portfolio holdings right on the wealth management firm’s Web site?

“How are you going to monitor all comments, as a firm or an advisor?” Ellis asks.

The Financial Industry Regulatory Authority this week issued rules on brokerage social networking use, offering up what Ellis calls a mostly sensible approach telling firms to ensure that application of such tools still complies with existing rules on protecting customer interests and data. “FINRA could have gone all panicky for new rules,” he says.

Still, no firm wants to be the test case for regulators to hold up as social networking bad actors, Ellis says.

Before making any moves, wealth management firms must decide what they want out of social networking – whether it’s new business or better client communications or other goals – before designing systems, Ellis says.

“[F]irms that bury their heads in the sand and hope all these new developments in cyberspace will just ‘go away’ are being unrealistic,” the report states. “It will only get more complex out there, and firms that opt out completely put their business with [Generation Y] investors and future generations at risk.”