the difficulty of having simple-to-use systems in place.
Faced with the challenges of serving client interests in the wake of the 2008 financial crisis, advisors often see compliance as one more obstacle to overcome.
Absent an entire rewrite of arcane rules, managers in the financial industry have told me there are a few things regulators like FINRA could do to simplify investor protections.
For example, some have suggested moving to a more principles-based approach for rulemaking. Callison points out that the SEC employs this philosophy, which essentially lays out a rule and then leaves it up to the firms to outline the best course of supervision.
In comparison, FINRA's prescriptive approach to rulemaking lays out specific rules for firms to follow. It requires firms to know – and implement – a great deal: static versus interactive content on the Web; pre-approval versus post-approval of content; content standards such as fair and balanced, and no false or exaggerated content; no predictions…the list goes on.
And while users of social media are on their sites to absorb quick, digestible pieces of information, the necessity of disclosures surrounding most financial conversations makes having a social venue for those discussions a real problem.
So a regimen that sets goals and allows some flexibility for reaching them offers advisors some options for serving clients responsibly while staying within regulatory boundaries
The temptation among many advisors is to just stay on the sidelines while the regulatory issues surrounding social media work themselves out. You may well say to yourself, “Why not let others mess up their reputations? We'll get started later, when we're ready and the system has ironed out the kinks.”
The obvious problem with that approach is that it means sitting out a dynamic market and ceding leadership to others. It may sound obvious, but in order to learn how to manage social media, you have to use social media. But the bigger problem with staying on the side in this industry is that it's unnecessary. A firm has a defense when something goes awry as long as it has policies and procedures in place to address what regulators expect.
Hamacher likens it to a sexual harassment policy: If a company has established rules explicitly restricting inappropriate behaviors, it provides the firm with greater protection, except in the most egregious instances.
The problem, she points out, is that “there isn't that clear statement in the social media world.” That's precisely why the industry remains so confused.
Who's to blame for this interpretational mess? Hamacher suggests the industry should look toward itself rather than at Washington rule-makers. The industry, she says, doesn't want to get caught with its social media pants down.
Remember, regulators' concerns are about preventing certain behaviors. But too many firms are saying: We don't want to do this because we don't want to get caught. In their view, if you post a bad tweet and it goes viral, you're in trouble.
In other words, while the industry should be focused on how to prevent underlying bad behavior – such as saying something they shouldn't on social media – they are more focused on a different issue: the concern that mistakes made on social media carry greater and more permanent exposure and damage. It's the consequences of the behavior and not the behavior itself.
Let me take this a step further. A broker might say something foolish in a phone call: “Mrs. James, I've got an investment that will double your retirement portfolio in three years.” But the odds of that broker getting caught are slim. “The industry has done a wink and a nod to that for many years,” Hamacher notes.
What if the broker behaved that way in the social media world? The behavior is easier to target. The penalties to his career are easy to imagine, to say nothing of what could happen to his firm. The industry has a clear opportunity for using social media to change firm behavior for the better, but many firms may choose to not change. “It's like sexual harassment: We instruct employees not to tell horrible jokes or touch people,” Hamacher says. “When the industry talks about social media, it's more focused on the fear of getting caught by the inappropriate behavior rather than using social [media] as a way to reinforce the right behaviors.”
So what should firms do in the light of what's happening? First, they have to view social media as part of their entire compliance effort. Chief compliance officers (CCOs) are expected to prevent misbehavior on websites, but many in the industry would agree that part of their job is to take greater care that such misbehavior doesn't leave a trail that regulators can pick up. The alternative? CCOs could use social media as an opportunity to train employees on how to sell appropriately. You may not get extra credit from regulators, but you will be able to more comfortably and quickly leverage this critical channel.
Enlightened firms don't fear being toast with a badly crafted Web message that goes viral. They would tell you that you just have to be thoughtful about how you approach social media. These firms are open to social media because they aren't afraid of conducting their business in the light of day. They've trained their employees, and they know that anything their employees say can be repeated in public because it's the right message. They also know that every compliance program turns up mistakes, fixes them, and gets a bit better. Perfection is not the regulatory standard; active supervision is the standard.
In today's transparent day and age, that approach carries the day.
Chapter 4
Are the Risks of Using Social Media Worth the Benefits?
The risk of not using social media is greater.
Some time ago I had a conversation with a twenty-something young man about a job offer he'd received from an investment advisory firm. The company wasn't active on social media at the time and had some misgivings about embracing a quickly evolving communications technology within a regulated – some might say hidebound – industry. Still, they understood the world was changing.
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