The trend toward social finance and the rise of new influentials

If you have been following the tweets from the CFA Institute at @CFAInstitute, you will see that the financial advisor industry is open to participating in the conversation in social media channels. As of late April 2012, the CFA Institute had more than 18,100 followers on Twitter and more than 71,330 likes on its Facebook page. Even though this may be an indication for financial advisors to dive into a world of likes and retweets right away, you do need to take this with a grain of salt.

Members and candidates of the CFA institute interested in using social media must understand the challenges of the profession in the online environment. The same rules set forth by the Standards of Practice Handbook still apply to online environments. Just like you wouldn’t trigger a buy or sell recommendation in person, you should maintain the same high standards in the social media arena. You need to keep in mind that given the global reach of social media, you should always adhere to the highest standards of compliance to the Code and Standards.

Additionally, the fast rise in valuation of social media businesses created an opportunity for unscrupulous traders who tempted greedy investors with false offerings. The most famous case is the one of John A. Mattera and The Praetorian Global Fund, which in November 2011 were charged by the U.S. SEC for defrauding investors by falsely claiming that they had access to pre-IPO shares of companies such as Facebook and Groupon.

Giving up on Social Media?

A December 2011 survey by the Aite Group appears to indicate so. The survey pointed out that the percentage of financial advisers who credited social media with helping them differentiate their practice from competitors dropped from 21 percent in 2009 to 9 percent in 2011. However, the problem with this survey is that these financial advisors are confusing the disease with the symptom.

Social media is not a magic bullet that will solve all of your customer acquisition and retention problems. Think about a technology that you take for granted today: email. Just like social media is doing today, the addition of email back in the early 1990s created both opportunities and challenges. Were there people like Mattera that reached out to naïve investors with “incredible” deals via email? Yes. Were there advisors that inappropriately provided buy recommendations without regard to the Code and Standards? Yes. The symptoms are now the same as they were before. It was through trial and error, and an understanding of necessary full and fair disclosures that the industry eventually learned the proper use of email.