(This is a guest post from Stephen Selby, Director of Regulatory Services at LIMRA.)

As social media users in financial services have discovered over the past couple of years, it’s tough to build a business in a swamp. It makes me think of the King of Swamp Castle from Monty Python and the Holy Grail.

Listen, lad. I’ve built this kingdom up from nothing. When I started here, all there was was swamp. All the kings said I was daft to build a castle in a swamp, but I built it all the same, just to show ‘em. It sank into the swamp. So, I built a second one. That sank into the swamp. So I built a third one. That burned down, fell over, then sank into the swamp. But the fourth one stayed up. An’ that’s what your gonna get, lad—the strongest castle in these islands.

Social media regulation has been a little like Swamp Castle. FINRA released Regulatory Notice 10-06, and built a foundational concept for all of us to follow—all the old rules apply. But the financial services industry as a whole did not believe that foundation was solid enough. We let the first castle sink into the swamp.

Then FINRA released Regulatory Notice 11-39. The financial services industry again said that foundation was not strong enough, so we again let social media fall into the swamp. Foreign regulators like the FSA in Great Britain and the IIROC in Canada published social media guidance in their own countries. The National Association of Insurance Commissioners issued its own white paper on social media. The messages from the FSA, IIROC, and NAIC all tracked well with FINRA’s core message—all the old rules apply. But the financial services industry was not happy with that foundation yet and, even with all of the positives, watched social media again fall into the swamp.

January 2012: The Fourth Castle of Social Media Regulation

Now we have both the SEC and the Commonwealth of Massachusetts issuing guidance for Registered Investment Advisors. To paraphrase the King of Swamp Castle—I am here to tell you what you’ve gotten—the strongest castle in these islands! We have seen securities regulators, insurance regulators, and now RIA regulators all say the same things: Yes, social media is an exciting new form of communication. Yes, we will apply existing rules to this new technology. It should be clear that we are no longer standing in a swamp, but on the strong foundation of a consistent message.

Let’s see how that consistent message applies to RIAs in the Commonwealth of Massachusetts. I will present these points in a different order than communicated by the Massachusetts Securities Division their memo of January 18, 2012. This order should help you structure your approach to social media for RIAs:

• Social Media is subject to supervision. Have a plan. Document it. Test the plan at least annually.
• Training. No policy or procedure is very good unless people know what it is. Therefore training is a really good idea.
• The firm is responsible for all business content. It’s social media time. Do you know what your investment advisor representatives (IARs) are saying?
• Social media is subject to record-keeping requirements. You will need a method of capturing and retaining social media content in a manner consistent with SEC retention rules. (For more, see 950 CMR 12.205(7)(a) and 17 CFR 275.204-2.)
• Frequent supervision is better. Massachusetts states on page 6 of their document “A review done daily would be considered a reasonable supervision of the adviser’s social media site.” Less frequent review can be acceptable—if you have low traffic volumes.
• Social media is usually advertising under RIA rules. Go back to the basics and apply current advertising content and supervision standards for RIAs to social media. Performance reporting via social media is subject to the same content and time standards as any other kind of media. Cherry picking past performance is not permitted. Recommendations are not permitted.
• Adoption and Entanglement applied across regulators. RIAs are responsible for content which they post, Tweet, re-Tweet, or like, or to which they link. RIAs are also responsible for content which is posted on behalf of their representatives by business partners or anyone else who has an interest in the success of the IAR. Selective removal of some content results in the “adoption” of the remaining content.
• “Liking” can be Problematic. To completely understand what Massachusetts is saying about the “Like” button, I encourage you to read SEC Regulation FD and the recent SEC risk alert. The key take-away is that your firm is responsible for any content which is “Liked” by the firm or an IAR. Make sure it’s good content.
• Read the SEC guidance. Massachusetts makes reference to recent SEC guidance on social media usage.

More Best Practices for Social Media Compliance

The Massachusetts document “The Use of Social Media by Investment Advisers” is not intended to tell the whole story. Here are a few ideas you need to consider beyond the recent guidance provided by the Commonwealth.

• Put clear license and registration disclosures in social media profiles. This will help insulate the firm against the appearance of soliciting where the firm is not registered.
• Update the firm’s Code of Ethics. Not all states require a code of ethics, but communicating a standard and then training your people to that standard is always a good idea.
• Face-to-face supervision is a best practice. Take time to review the computers and mobile devices of IARs when visiting satellite offices.
• Understand what is being said about you by solicitors and other business partners. You may need to review agreements to specifically address the use of social media.
• Get help, but take responsibility. Social media use and supervision is ultimately up to you, but Socialware and LIMRA can help get you going.

In closing, think of the King of Swamp castle. “All the other kings” may say you are daft for using social media when there are so many questions, from ROI to compliance. Prove them wrong. Now that regulators for the securities, insurance, and investment advisory business have spoken, you have a firm compliance foundation on which to build your social media practice.

When so many regulators are saying the same thing—maybe you really do have the opportunity to build the strongest castle in these islands.

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“Social is a shared service that’s used across the enterprise. As such, the CIO is responsible for being the integrator of those solutions.”

Wolberg also talked about how often CIOs, CTOs, CISOs, and other IT leaders are “at the nexus of saying ‘No’,” and how refreshing it can be to be able to say “Yes” to new initiatives or tools that enable better business outcomes—especially in cutting-edge areas like social.

IT as a Leader, Not a Follower, in Social Business

For more perspective on this, I talked with Ken Burbary, a technologist who serves as Vice President and Group Director for Strategy and Analysis at the global agency Digitas. His work puts him in touch with business leaders across different industries who are grappling with the implementation—and the implications—of social business practices.

“IT has a key role in all of these amazing and disruptive innovations. The days of command and control IT are waning, if not over, in most companies. So how can the CIO stay relevant to the business? By clearly articulating how to help internal clients be successful in achieving their goals by leveraging social technologies.”

Burbary is quick to acknowledge that this doesn’t change the IT organization’s dedication to maintaining traditional responsibilities for security, data integrity, and so on. But the approach has to be collaborative. “I’ve found IT departments that try to extend the command and control mentality into business units that are looking to be more agile and leverage disruptive technologies like social fail—they fail miserably and just get shut out and worked around.”

Avoiding the Risk of “Crowdsourced IT”

Burbary’s point was echoed by Adam Cohen, Senior Vice President for Digital and Social Media at Fleishman-Hillard. Cohen, who spent years helping major enterprises implement back-office systems, highlighted the connections between security, risk mitigation, and “crowdsourced IT.”

“If IT says no to an idea sponsored by a business unit without supplying better alternatives, employees may simply go outside the constraints of IT,” Cohen said. “Technology has changed, and people can get a lot done without involving IT if they want to.” Especially in financial services, he added, “employees talking about anything on social networks in an unsupervised or unstructured way is a risk.” In his view, these factors imply that “it’s actually riskier for an IT department not to be involved in social media.”

Again, IT organizations that embrace this viewpoint can become enablers of positive business outcomes for other areas of the company including marketing, compliance, and sales.

CIOs Look to Emerging Best Practices for Social Business

The good news is that you don’t need to go it alone. Flagship enterprises in financial services and other industries are establishing best practices to embrace the social technologies that provide a competitive advantage and improve internal and client-facing operations while maintaining compliance.

These best practices, which we will continue to discuss in future posts, allow IT departments to move away from “the nexus of saying ‘No’.” We’re here to share what we and our partners have learned from enterprises and IT departments across the industry.

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Last week I sat down with Socialware CEO Chad Bockius for our 2012 Predictions webinar, in which we discussed the social media trends he sees emerging in financial services. Now you can listen to the archive of the webinar to hear why Chad thinks that this is the year when social business gets personal, along with his specific predictions for consumers, financial advisors, regulators, and enterprises.

Social Business Questions Advisors and Enterprises Must Answer

Early on, Chad made the observation that “Social is how we live now—not just how we play,” and pointed out that consumers are increasingly turning to their social networks for trusted recommendations on handling their finances. We then talked about a number of issues that financial professionals must address if they want to get the most out of this sweeping change, including:

• What do enterprises need to do to build momentum in social business?
• “Social is the unfair advantage of 2012”—but how engaged does an advisor need to be to expect returns from social?
• What actions can we expect from the SEC and other regulators this year, and what can companies do to be ready?

As you’ll hear in the webinar archive, we left half an hour for Q&A—but still weren’t able to get to all the topics raised by audience members. Here were some of the questions we discussed:

• “Companies are losing support and engagement from the broader firm because only a select few have access to social media. . . . What would you recommend?”
• “Do you have any advice for social networking as it pertains to independent broker/dealers? Is there an added benefit in social media for a B2B-based firm?”
• “When you talk about 100% adoption, are you referring only to the sales force, or to all employees including marketing, product, and support personnel?”
• “We have brokers who are on LinkedIn and they always ask, ‘I’m on LinkedIn, I have connections, now what?’ How would you answer them?”

To hear the discussion around these questions and many others, click here for the webinar archive page. And feel free to leave more of your own questions in the comments on this post.

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Substantial social media change and growth

The entire social media landscape has evolved quickly on the regulatory front (the release of FINRA 11-39 was already months ago!), technology front (numerous updates to Facebook, LinkedIn, Twitter, and more), and also, very importantly, best practices as financial advisors discover and improve upon using social media to develop new and strengthen existing business relationships.

A few weeks ago, Chad Bockius, Socialware CEO, and I hosted a 2011 Year in Review webinar. There were so many potential discussion topics, yet we focused on a few specific points:

• Growth of Facebook, LinkedIn, and Twitter
• Evolution of the regulatory landscape (For even more recent developments, read about SEC and FINRA updates this week.)
• What it takes to deliver social business success within a firm
• It’s about the client, not the firm: how client relationships are changing and why social media matters.

Future social business potential

Since we are already in the second week of January, now it’s time to move onto the potential of 2012.

This week, Chad tackles 2012 Predictions for Social Media in a live interview regarding what to expect going forward. Social networking is getting personal for firms. Here are few topics that you can look forward to exploring:

• Overarching trends for business social networking
• Realizing corporate leadership commitment for social media
• How to grow social media use effectively throughout your organization
• What are some of the emerging social media technologies for 2012?

Tune into the webinar and the Q+A to learn more about what to expect for social business developments in 2012.

Podcast about Social Business for Financial Services

Earlier this year, I had the opportunity to speak with Donna Sullivan of LIMRA about the social media developments in the industry.  We recorded an 11 minute podcast, LIMRA Industry Pulse Podcast: Social Media Use in the Financial Services Industry, that highlights our conversation surrounding how networking has evolved for agents and advisors, how social media leaders reflect on social media for financial services, and also what advisors are saying about the opportunities and challenges of social media.  There are also related videos with more detail to these conversations.

Business Social Networking: Stages and Success Metrics

More recently, I was fortunate to speak to marketing leaders from more than a dozen firms at a meeting we hosted in Boston.  There were representatives of wealth management, asset management, insurance, and more.  The meeting discussion took many twists and turns about social media, but one observation really stayed with me after the meeting.

One attendee who is responsible for the social media roll out to thousands of financial advisors shared a very nuanced and skilled philosophy about preparing the firm to be “social media ready.”  This included cross department conversations and alignment, education to create social media content or retrofit existing content, train corporate and field teams on social, and to develop measures of success that made sense depending on the stages of the process.  For example, the firm would not plan to measure social media success in terms of lead generation until this process was in place, advisors were trained, and these advisors had the time to build their social network connections.  This methodical and thoughtful approach was setting the firm up for alignment and social media success.

Upcoming: Social Media 2011 Review, FINRA 11-39 and more

We are all looking forward to the 2012 conversations to begin, but before leaving 2011, Chad Bockius, Socialware CEO and I are hosting a 2011 Year in Review webinar on Friday, December 16.  We welcome you to join us and compare if our highlights from the year match yours and perhaps provide additional insights.

Most of a Financial Firm’s Profits are Made from Serving High Net Worth Individuals and Active Traders

There is a reason why financial services firms spend so much money, time and energy marketing to high net worth individuals and active traders. That’s where they make the bulk of their profit. Think about it, if a financial firm earns 1% annually on assets under management, a $7 commission per trade and maybe mere pennies per share on the spread for trades it takes big numbers to generate a meaningful profit. A client with a $1,000,000 balance would generate $10,000 in annual fee revenue and a trader who makes 500 trades a year would generate $3,500 in commissions plus a few grand in spread revenue. And because these investors might also trade on margin we can expect some earned interest revenue to be generated as well.

Now of course the above numbers are just revenue. Financial firms, like all businesses, have expenses too. The buildings, technology, phones, printing, postage, electricity to run it all and the employees that make it all happen. What this means is that not all customers are profitable for the company. A client with a $10,000 balance will likely not generate enough fees or trading revenue to cover the costs of serving him with the same high touch that is made available to the high net worth set and active traders. And since there are only so many high net worth individuals and active traders to go around the competition for these clients is fierce.

The Top Financial Advisors Also Produce The Bulk of the Profit

The 80/20 rule also applies to financial advisors in the same way that it applies to customer type. I recently spoke at an advisor conference where the attendees were in the top 15% of revenue producers. In order to qualify to be in that room they had to generate $750,000 in annual revenues for the firm. If we apply the same 1% model as above, each advisor would need to manage a book of business around $75 million or higher make the cut. If we assume that an advisor would manage 100 or fewer client relationships this means that each client would have at least $750,000 but likely $1 million or more in investible assets. There are only 8.4 million households in the United States with an investable net worth of $1 million or more and hundreds of thousands of financial advisors chasing after them.

Not Every Advisor Can Be In the Top 20%

The top 20% (or 15% as described above) is just that, the top. Not every advisor will make it to the top. Most of today’s top advisors got there because they were better at hustling for clients with the tools available to them in the past. When I ask these advisors how they built their book of business many of them tell me that cold calls, luncheons, referrals and traditional networking were all keys to their success. Those advisors who could burn up a phone and work a room (the right room) better than their peers rose to the top. Those advisors who struggle with these mediums either washed out or are growing more slowly.

Today’s Top Advisors Will Not Be Tomorrow’s Top 20%

Technology is frequently a disruptive force that shifts the balance of power much quicker than people expect. I have written before that advisors ignore social media at their peril. Right now there are advisors who are grabbing social media tools by the reins and riding them hard to build their book while advisors who are already at the top are holding on tight to the horse that brought them here. It’s only natural.

Will every advisor who is an active social media user make it to the top 20% in the future? No, of course not. Why? Because we are quickly moving to a world where every advisor will be using social media tools as part of their business just as today’s advisors all use the phone and email. Those who use social best will almost certainly rise to the top however, because social media is so much more than just posting updates. Social media tools allow a financial professional to do all the things today’s top advisors did to become successful with much greater efficiency than ever before. Meeting new prospects, staying connected, driving people to events, marketing, client service and staying informed are all aspects of growing a successful financial practice that are greatly enhanced via social media.

If you are a financial professional using or exploring the use of social media in your practice realize that the competitive edge is yours for the taking. Not every advisor is going to “get it” and many of those who do get it are going to tire or get comfortable and plateau. You have an advantage that you might not see again in your lifetime. Social media will never be this new again. If you want to be one of the top 20% who reaps 80% of the value now is the time to go for it.

If you are charged with leading the social media initiative at a financial services company my recommendation to you is to pay special attention to those individuals who are using social most aggressively now. Be sure to give them access to powerful and compliance friendly tools and start studying their behavior. Many of those advisors are going to be your top producers in the not too distant future. The urge to focus on today’s top advisors and drive them to social is understandable and you should do your best with that population if for no other reason than to protect their client relationships. But, there is lightning in the bottle with the advisors who are active on social media already.

With so much value tied up in the top customers and the top advisors it is critical to put a framework in place to connect the two now and for the future. High net worth investors are increasingly using social media and active traders are always looking for an edge, hence the rise of niche social networks like StockTwits. Not surprisingly, financial advisors have flocked to social in big numbers as have insurance agents and bankers to meet these high value clients on their preferred medium. Those who are active and productive early are going to capture the most value.

Here are just a few places that you will find the Socialware team this month and next…

The National Society of Compliance Professionals 2011 Annual Meeting- We are currently attending this week’s annual meeting in Baltimore, Maryland and plan to attend Stephen Selby’s session on Social Media and Electronic Communications.

LIMRA Annual Conference- Next week, you will find members of the Socialware team at this conference in New York City.  We are looking forward to another great conference hosted by our strategic partner, LIMRA, especially a session on Social Success Strategies with Gregg Weiss from New York Life.

The Future of Wealth Management: Social Media- You can register to attend this FierceFinance webinar on October 26 presented by Lauren Boyman, Director of Social Media, Morgan Stanley Smith Barney and Socialware CEO, Chad Bockius, to learn more about how brokerage and wealth management firms are pursuing social media channels to connect with prospective and existing customers.

FINRA Advertising Regulation Conference- At the end of the month, we will have staff attending this FINRA conference in Washington, D.C.  The conference has very timely sessions including Compliance Considerations for Social Media.

Again, these are just a few places you will find members of the Socialware team.  We are looking forward to the opportunity to network with you.

We just released the 2011 version of the survey results with even more data about the impact of social media on the financial services industry, particularly focused on the advisors themselves.

Here’s some background on the advisors:

• Age- It wasn’t just the younger advisors who said they were using social media.  75% of the advisors replying to the survey were 36 years or older.
• Practice type- Advisors from all segments expressed interest in the survey.  Independent advisors, others with large firms, advisors just starting, and many with very established books of business.

Social media usage had definitely increased since last year.  In our 2010 survey, 60% of the responding advisors were using social for business purposes.  Fast forward to this year, and the number was greater than 80%.  And they are seeing results telling us about the referrals, prospects, and new clients coming from developing and deepening relationships through social media.

Prioritizing social media among the advisor’s tool set of options is increasing as well, so it’s not just a matter of “using social media.” Here’s how some of the advisors described social media in their own words:

• “This is where the people are.”
• “I think it’s a must going forward if you look to be competitive.”
• Social media is a “great way for prospects and clients to learn more about us and deepen relationships.”
• “We want to grow our firm by 20% annually for the next 5 years. We find social media to be an incredibly cost effective way of achieving that.”

To learn more about the survey results, the executive summary is available now.

Social Media is a Key Financial Marketing Tool for the Future — Just Comply!

Tom Groenfeldt, Forbes

Financial firms are striding into social media with their peripheral vision scanning for warnings from regulators of compliance problems.

Mastering Social Media

Ellen Uzelac, Research Magazine

Social networking cannot be ignored, and there’s a right way to do it.

How to Deal with the Brave New World of Social Network Policies

Tom Steinert-Threlkeld, Securities Technology Monitor and Financial Planning

Social networking? Everyone’s doing it. Particularly your next generation of fund customers. You will want to reach them, as they walk and talk through the Internet.

New York Life: Allowing Negative Comments on Social Networks Will Positively Build Your Brand!

Bradon Gutman, Forbes

In this Brand Innovator Spotlight, Ken Hittel, VP Corporate Internet at New York Life explains how the insurance company is growing a positive brand presence online by allowing consumers to speak freely.

Get With The Social Media Program

Mike Byrnes, Financial Advisor

Firms that prohibit use of social media are fighting a losing battle, and should instead focus on how to use it compliantly, said attendees at a social media conference in Boston.

The agenda sparked a lot of questions and involvement from the audience including topics such as the empowered consumer and the regulatory environment especially for financial services firms. When Chad Bockius, CEO of Socialware, was asked whether there was truly a high cost of not participating in social media, Chad explained that the train had already left the station.  Firms need to take advantage of the opportunities to build valued customer relationships using social media.  Since this is constantly evolving landscape, there is no perfect time or plan.  If firms wait six months to put the “perfect” plan in place, that plan will no longer address all of the changes that will take place from now until that time.

Addressing practical implications of setting a social policy, Steve Selby of LIMRA explained that the difference between a good and bad social policy is finding the right balance vs. operating at either end of the spectrum of complete prohibition or wide open access.  Steve went on to address audience questions about FINRA regulatory notice 10-06, specifically static vs. interactive content, and guidance from other regulators like the SEC.  Steve explained that we shouldn’t look for  a “sea stage” from an expected FINRA clarification on social media later in 2011.

Edgar Rodriguez of Distribion, Bockius, and Selby all discussed the connection between the relationship dynamics of social networking and the need for technology to assist in the large volume of interactions, and Edgar expanded on the ability to measure the effectiveness of these interactions and provided helpful suggestions for getting the most of the social interactions.  To learn more about the webinar, you can follow the conversation on twitter #socialmediawebinar and view the webinar.