How Firms Are Complying With FINRA 11-39

By: D. Bruce Johnston, President & CEO

As social media begins to play a more prominent role in the everyday lives of advisors clients, advisors broker-dealers are taking a more active role in training and educating them on the power of social media.  Certainly, prompted by the training and education mandate outlined in FINRA 11-39, some firms view social media as a recruiting and retention tool.  While some of their less than agile larger competition struggle with identifying archiving solutions, they are plunging into what I consider the next frontier – education of the advisor at the “user” level.

There is no question that excellent archiving solutions exist, and there is a size and capability solution to fit all.  The real issue is how do you drive training to the Registered Representative and Advisor level.  Until their trained, the use of social media as a client acquisition and retention tool will be in the cloud, just like the best archiving solutions.

The following may serve as a template for what one cutting edge broker-dealer, Madison Avenue Securities, is doing to satisfy FINRA 11-39 training and education requirements, while at the same time differentiating themselves as an industry leader in the race to harness the power of social media.

I would welcome your comments and examples of what other broker dealers are doing to help their Registered Representatives leverage social media.

In the world of financial services, social media is certainly an enigma.  Rare is the day we don’t see an article on the benefits social media can provide us both personally and professionally.  Yet we haven’t seen wide spread adoption by asset managers and advisors. Why, and what opportunities are being missed?

First, social media is very young.  So young in fact, that a recent Altimeter study estimates that most companies outside of the financial services world have only had social media programs in place for 2.5 years.

Therefore, if you are one of a handful of financial services firms that has headcount, a budget, have put a social media policy in place and have launched a formalized social media strategy you are considered a pioneer.  Not to mention you are also one of the firms that has an archiving solution in place to satisfy the compliance demands that accompany social media programs in a highly regulated industry.

Just as the Internet and email have become ubiquitous over the past 15 years, social media will be the same, only faster.   It will weave its way into the fabric of the asset management business and influence heavily how asset managers communicate with advisors and clients.  Why? Customers will demand it.

Investment markets and the widespread adoption of social media have radically changed asset managers’ customer behavior forever.  An understanding of these changing market forces would serve asset managers well, they include:

• A decline in the trust of financial services firms. In a world where the words ethical, trustworthy and consistent are the attributes advisors list as most important when selecting and conducting business with an asset manager it would serve asset managers well to practice transparency and candor in all of their communications.

January’s First Command Financial Behaviors Index states there is a deep distrust of the financial services industry, although 90% of clients say they trust their own advisor.  Driving those positive feelings were “personal relationship” and “good service” from their advisor.

These warm feelings towards their advisor contrasted sharply with distrust of the financial services industry, which sync with an annual Edelman Trust in US Financial Services survey, which found that 46% of respondents said their trust in financial services companies had fallen in 2010.  In fact, only 15% of the individual investors stated they would trust portfolio managers for investment advice.

• Social Networking provides, and will play a more prominent role in the future as advisors and their customers leverage their ability to instantly tap into large sources of data and crowd source advice from absolute strangers.

• Engagement or that ability to engage colleagues, peers and complete strangers is becoming easier more accepted and will allow advisors and their customers to maintain and engage with a much larger peer group in the future.

So, given these market-changing forces, how will social media influence advisor and client investment decisions in the future?  The Millennial generation may provide a few insights. This group will inherit an estimated $40 trillion from their boomer parents, will eventually comprise approximately 29% of the U.S. population and are affectionately referred too as “digital natives”.

You don’t place a phone call to this generation if you want to connect, you text.  They will give up a lot, as long as its not their laptop, cell phone, MP3 player or broadband Internet connection.  Google is their main source of answers to their questions and everything is fair game to be posted on Facebook or YouTube.

Asset managers and advisors can capitalize on these millennial preferences by being straightforward, transparent and consistent with their communications.  They need to become comfortable delivering their messages through what they might consider non-traditional communication channels – Facebook, Twitter, LinkedIn and leveraging their firms website.

Asset management firms who’s website assist the advisor and investor in understanding their investment process have an advantage.  Asset management firms delivering their message across the spectrum of social networking sites have a competitive advantage.  Advisors and clients now go anywhere and everywhere to gather the information they need to make an informed investment decision.  Asset managers that make sure their messages can be found in the places advisors and their clients are looking for that message will win in the long run.

The emerging world of the Millennia’s is one where they place a significant amount of emphasis on trustworthiness and honesty.  They seek advice from parents and peers, put a premium on professional feedback and word-of-mouth referrals and prefer face-to-face meetings.  The world of the advisor is one of fine-tuning and reducing the number of asset managers they work with.

Asset management firms that grasp the nuances of this newly emerging target audience and design communication strategies that include their preferences will capture their share of this estimated $40 trillion market.  Those that don’t will compete for a shrinking piece of the pie as the top 10 firms continue to fine tune their communication strategies and take a larger piece of the investable dollar pool.

That is the title of financial services research firm Corporate Insights update to their 2008 study on the topic of social media in financial services.

The attached video interviews Alan Maginn, Senior Analyst, Consulting Services and asks him to answer these four questions:

• How are financial services firms using social media?

• How are financial services firms handling customer service in regards to social media?

• How are financial services firms using Twitter?

• How are financial services firms using Facebook to interact with clients and prospects?

While I appreciate Alan’s comments, and they are appropriate, he may have overlooked the widespread adoption and use of social media by mid- to small-sized asset managers and the robust adoption and use of social media in the RIA and Independent Financial Advisor space.  At DBJ Associates we have seen a tremendous curiosity and adoption of social media by our clients over the past two years, a trend that shows no sign of abating.  In fairness, I have not read the Corporate Insights (www.corporateinsights.com) 300-page study where in fact this might be discussed.

I would welcome your comments.

For the past 19 years, Charles Schwab & Co, Inc. annual conference, IMPACT, has been bringing relevant presenters, exhibitors, subject-matter experts and advisors together in a conference to help keep Schwab clients and partners ahead of an ever-changing curve.

This year, in order to give my reader’s a little insight into what’s going on inside the Boston Convention and Exhibition Center, site of the conference, I am providing readers of my blog with selected tweets, sent from those inside the convention.  I have attempted to line-up the tweets with the agenda presentation they pertain to.

As a special thank you for reading this far I thought I would bring you this video of Tom Lydon on CNBC Live from SchwabIMPACT discussing ETFs.

IMPACT 2010 kicked off last night with Mellody Hobson, president, Ariel Investments, Liz Ann Sonders, chief investment strategist, Charles Schwab & Co., Inc., and Maria Bartiromo, Anchor of CNBC’s Closing Bell, on a panel discussing the theme: Outlook 2011: Investors, the Markets and the Economy.

Tweets:

DBJAssociates D. Bruce JohnstonFrom @RIABiz: 6 things to know about Schwab Advisor Services on the eve of its IMPACT 2010 … http://riabiz.com/a/2992001 #Schwab4RIAs

DBJAssociates D. Bruce Johnston From @RIABiz: Mellody Hobson and Liz Ann Sonders kicked off IMPACT on a bullish note http://riabiz.com/a/3007042 #SchwabIMPACT

Wednesday Morning – October 27, 2010

Here’s how the morning got started:

DannymJohnson Danny Johnson Hide yo’ kids, Hide yo’ wives, and hide yo’ husbands too. Paulson about to address the #SchwabIMPACT crowd. Run and tell that….#dobson

In a conversation with Liz Ann Sonders, Henry M. Paulson, Jr., will provide his insight into what really happened in Washington D.C. in the fall of 2008. Now that he’s a private citizen and has published a book about the administration’s response to the financial crisis, On the Brink, he and Ms. Sonders will discuss the meetings, controversies, rapid decisions and extraordinary people involved. Find out how and why they did what they did.

Tweets:

Schwab4RIAs Schwab4RIAs Liz Ann Sonders is now interviewing Hank Paulson. #SchwabIMPACT

rogergward Roger Ward Paulson-Fannie and Freddie were elephants too big for the tent. #schwabimpact

RJPIII Robert Powell At #SchwabImpact 2010…Paulson said BearStearns was “too interconnected” to fail and had a buyer…Lehman Brothers had no buyer

Wednesday Afternoon – October 27, 2010

Greg Valliere, Chief Political Strategist, Potomac Research Group, will give us his mid-term election predictions and discuss how the results could affect tax and regulatory policies that are being developed in Washington D.C. right now. You know him, you love him and you won’t want to miss his presentation.

melissabmurphy Melissa Murphy Potomac Research Group’s Valliere: tax cut extension likely for everyone #schwabimpact

amyrill Amy Hayes Stellhorn Greg Valliere “it’s likely that we will get (Bush) tax cuts for everyone extended” #SchwabIMPACT

amyrill Amy Hayes Stellhorn Valliere: Things to worry about 1) Red Ink (deficit) 2) Fundamental Radical Islam (Pakistan, Iran, War in Afghanistan) #SchwabIMPACT

melissabmurphy Melissa Murphy Valliere: deficit with stay high for next two or three years and bond market couldn’t care less. #schwabimpact

tsollinger Travis Sollinger Greg Valliere hits another one out of the park at #SchwabIMPACT Great talk!

Tweets of Interest

AdvisorTweets AdvisorTweets We’ll be watching the #SchwabIMPACT tweets: RT @Schwab4RIAs: Jim McCool: More than 1600 independent investment advisors here today.

BillWinterberg Bill Winterberg CFP® Junxure, Salesforce, Microsoft Dynamics Are The First Schwab Intelligent Integration Partners http://bit.ly/aDaV3A #SchwabIMPACT

NexusStrategy Tim Welsh salesforce.com, Junxure, Microsoft are CRMs chosen for Schwab Intelligent integration #SchwabIMPACT

RIABiz RIABiz Schwab announces the three CRM vendors it will integrate first: Junxure, Salesforce.com, Microsoft #SchwabIMPACT

JCPR JCPR CNBC: What Pros Say: Hedge And Look For Alternatives #SchwabIMPACT http://www.cnbc.com/id/39868914

Gonna Have Some Fun Tweet

shorespeak Rob Shore At #SchwabIMPACT. Met 300+ wholesalers & passed out I Carry The Bag. Tonight is meet-up at Lucky’s.

I hope you liked this peek behind the scenes at Schwab and the opportunity to see it through the eyes of Twitter.  Should I do it tomorrow?

What is 174 pages, calls for two sub-parts, one part calling for 18 different disclosures, and will take firms 15 to 60 hours to complete with cost estimates ranging from $3,000 to $10,000?

Clarity vs. confusion with Form ADV-2

It’s nothing less than the Securities and Exchange Commission’s Form ADV Part 2.

Emerging from the confusion surrounding the new rule, two things are certain:

• Both state-registered and SEC registered advisors will have to fill out the new ADV form Part 2
• The form is no longer a check-the-box exercise and requires strict adherence to a plain English standard

Tripping over the details

Yes, Part 2A requires narrative brochures about an advisory firm and Part 2B requires brochure supplements containing information about certain supervised persons. How is all of this supposed to be written in plain English under such a short deadline?

Though challenging, there are several sources available for guidance. Readers of RIABiz can access recent articles by Brooke Southall and Les Abromovitz, which provide practical suggestions on how one should handle various aspects of the New Form ADV Part Two.

Investment News reporter Lisa Shidler addressed RIA concerns in her article “New Form ADV-2 adding costs, confusion” detailing important sources of advisor frustrations.

Looking for answers

Advisors have a chance to listen to an overview of the new Form ADV Part 2 sponsored by Huntington Asset Services on December 1, 2010.  The webinar will include a discussion of plain English, as well as practical drafting tips, and delivery, filing and updating requirements. The webinar is available at no cost.

Although fraught with challenge, a well-written brochure can also become an effective and compliant marketing tool to serve as the foundation for a firm’s future marketing initiatives. That is why advisors should learn as much as they can about the ADV Part 2 requirements and seek out trusted experts for assistance. Financial writers like John Drachman and others have extensive experience in crafting plain English narratives for an RIA’s products and services.

Also, to facilitate and guide the discussions about the new rule, DBJ Associates recently launched RIA Forum on SEC Form ADV Part 2. Interested readers are invited to join the group and weigh in.

By: D. Bruce Johnston, President & CEO

At the very moment in last nights NLDS game that I thought the Reds looked more like the Keystone Cops than a professional baseball team I received the following tweet from @BillSledzik: “Reds are truly pathetic. Is this little league?”  Followed moments later by this classic: “ If only the Reds had Doc Ellis on the mound. Now that would be a trip. Oh well. http://bit.ly/cEBi2f #Reds “.  The word “trip” may have been lost on others, but not on those of us who grew up in the 60’s, man.

If you read the story it will become clear how LSD and Doc Ellis made their way into baseball lore, and thus into the title of this blog.  But that’s not the point.

Where does Kent State fit in? With a fair amount of curiosity, heightened by the Reds collapse, I figured I was only a mouse click or two away from learning more about Bill Sledzik.  Two clicks and there I was on Bill’s www.toughsledding.com site greeted by this headline: “Kent States’ Online PR Master’s is set to launch”.

An exciting time at Kent State for sure as they prepare to launch the program in January 2011.  Unique to this program is that faculty members have been living in the social media space for 5 years or more, but to date have been delivering half their classes online and half face-to-face (F2F).  This entire degree program will be delivered in the virtual world.

In the world of social media, life is viewed as a two-way communication street.  If you don’t want to know what the world is thinking about you, don’t ask. It appears that Kent State asked.  The responses they received helped them; identify the need for an Online PR Master’s program; necessitated they communicate their intentions to their core audience; solicit feedback (market research); and, based on the data gathered they developed their Online PR Master’s program solution.

What they learned was “the majority of working professionals seeking a master’s in PR can’t put life on hold for 2 years and move to Kent, Ohio.  And our market for part-time students in the F2F program is limited to those who live and work within 50 miles of campus.”

“Professionals seeking advanced degrees want to do them online.  The online degree has no geographic restraints or real-time class schedules.  Students access content from anywhere, so long as they have an Internet connection.  They absorb lectures and join discussions at their convenience, not ours.”

The question financial advisors need to ask themselves is: Does your current client acquisition, client retention and revenue growth strategy match-up to Kent State’s?

The challenges of client acquisition facing today’s financial services professionals are no different then those faced by Kent State.  Potential clients know no geographical boundaries.  They are seeking professional guidance that will help them achieve their short and long-term financial goals.  That guidance can come from the advisor down the street or across the country – they don’t care. Savvy advisors are meeting the client acquisition challenge by creating an online persona designed to differentiate themselves in the cluttered marketplace through defined thought leadership campaigns.

If, as is the case with Kent State’s audience, they are seeking advanced degrees online, what does that tell you about your current client’s communication preferences?  My guess would be your client base is educated, several with advanced degrees, professionals and business owners in some cases – not unlike Kent State’s student profile.  Accelerating your online communication strategy can go a long way to enhancing your client retention statistics.

Financial advisors can also takeaway a revenue growth strategy from the Kent State example.  Recognizing that their F2F market is limited geographically they looked to the Internet to deliver additional revenue.  Combining well thought out client acquisition strategies with client retention strategies results in a more stable and predictable revenue stream for your business.  It’s well documented that the most expensive client is the new one – better to take care of what’s you’ve got versus what you’d like to have.

Some habits are hard to break. I couldn’t help but notice the “Sigmund your slip is showing” comment:  “It’s imperative that every element of every class be up and running 60 days before the students arrive.” If they arrive it certainly won’t be by car.

Amazing what you can learn by going back to school, be it by car or online!

By: D. Bruce Johnston, President & CEO

How social media is used determines the best archiving solution

Social media’s popularity, reach and place in the workplace is undeniable.

Fund companies that believe employees are only checking their email accounts should pay special attention to a Nielsen study released August 23, 2010.

According to the study, about 23% of employee’s time is spent on social media websites such as Facebook and Twitter, versus about 8.3% of their time is spent on email. Social media website usage is up significantly from last year’s study which revealed usage at 15.8% and email usage is down from 11.5%.

In the regulated world of mutual funds this increased popularity and activity means the need for a social media policy and an archiving solution has never been greater.

Once your social media policy is in place, examine the regulatory guidance that has been available since the beginning of the year. Regulatory guidance provided by FINRA Rule 10-06 and the SEC informs compliance and marketing professionals on how best to approach their social media options.

One key area for regulatory concern centers on how digital content is archived.

Is there a best-in-class universal archiving solution?

That depends on what you want your content to do.

Chad Bockius, CEO, of archiving firm Socialware, says that firms need to answer questions like these to find the best archiving fit for their needs:

• Will you be developing content for social networks?
• Will you require moderation of social media content?
• What will be your monitoring needs for the user? For the supervisor?
• Will you need to search the archive? Build reports?
• Will you need an IT staff to manage the system?
• Will you download the archive for security purposes?
• Will you need to monitor what is said about your firm through keywords and keyword phrases?

Socialware scans, captures and routes content for pre-approval, helping to ensure inappropriate content doesn’t post to the social networks. The technology automatically and seamlessly captures and archives content for review and storage after it is posted.

Blane Warrenne, CEO, Arkovi, said that his firm “delivers a social media solution built for financial services with features for archiving, compliance surveillance, content moderation and reporting.”

Arkovi connects directly with social networks and social content sources, including blogs, Facebook, Foursquare, LinkedIn and Twitter.

Smarsh’s Ken Anderson, CMO, said his firm “provides hosted solutions for archiving electronic communications, including email, IM and social media platforms such as Facebook, LinkedIn and Twitter.”

With the increasing availability of cost-efficient compliance and archiving solutions, barriers to financial social media marketing will continue to tumble.

By D. Bruce Johnston, President & CEO, Advisolocity

Social media agency Advisolocity was invited this week to join a new leadership council that aims to cultivate and communicate the best practices of a growing number of social-media minded investment marketers, service providers and financial advisors.

The SocialTurns Council is made up of specialists from the fields of compliance, marketing, technology and financial services.

As one of the group’s founding members, Advisolocity joins industry leaders:

• Pat Allen, Principal, Rock The Boat Marketing
• Debbi Corej, VP of Compliance, Prudential
• Julie Gebert, AVP of Compliance, Cambridge
• Kip Gregory, Principal, The Gregory Group
• Bruce Johnston, President & CEO, Advisolicity
• Kristen Luke, Principal, Wealth Management Marketing
• Christina L. Nelson, Senior Editor, Financial Planning Association
• Stephanie Sammons, CEO, WiredAdvisor
• Stephen Selby, Director of Regulatory Services, LIMRA
• Pete Chiccino, EVP and CIO, The Bancorp Bank

The rationale for the group includes the following excerpt from its mission statement:

“Social media has so much to offer the financial services industry yet education, awareness and questions are holding it back. Our hope is that by bringing together industry experts, passionate users and those standing on the sidelines that we will be able to accelerate the adoption of social media.”

A group spokesperson added, “In the last few weeks we’ve invited users to sign-up for the preview and the reaction has been tremendous. To date we’ve had almost 500 users join SocialTurns from 13 different countries and the discussions are off and running ranging from enterprise social media adoption, to FourSquare, to employee guidelines.”

As president and CEO of Advisolocity, I would like to personally invite you to join the pre-release of SocialTurns.com. The site will go live to the public soon and I would like you to have a chance for a first look at the community and to join the conversation. Simply e-mail me here for a user name and password.

During Huntington Asset Services’ recent social media webinar event, I mentioned the new “ABCs” of financial social media.

Social media helps small advisors and managers stand out

In addition to the ABCs of wholesaling — “Always Be Closing” – today’s investment marketers are learning a new alphabet:  the ABCs of financial social media, “Always Be Connecting.”

The world of social media rewards those who are able to connect and engage their customers.  This benefits small asset managers and advisors because they not only can Always Be Connecting, they can also:

• Always Be Experimenting. Developing a social media strategy and presence is not a one-size fits all or one social media application fits all proposition. Small advisors can afford to experiment by testing concepts and approaches until they find those that work best. This ability to experiment and modify strategy while building relationships during the experimentation phase of your strategy advantages the small asset manager and advisor.

• Always Be Moving Forward – Just Do It. I’ve heard it hundreds of times from executives at large corporations: “We’ve formed a committee to evaluate social media and whether it’s for us or not.” While the larger organizations are in paralysis you should be moving forward with your social media strategy.  There isn’t a lot of testing that needs to be done.  Social media applications are being introduced at warp speed and are being fine-tuned at the same speed.  Advice and guidance are readily available.

• Always Be Touching Your Followers. Small asset managers and advisors hold a distinct advantage to their larger competitors when it comes to understanding their client and what they want. Large organizations pride themselves on the size of their customer base versus the quality.

• Always Be Engaging. If you’ve been in business for a while you probably have an established customer base.  With millions of people on Twitter, Facebook and LinkedIn it’s a safe bet to think that you may find your customers already online.   If asked they may be interested in joining your professional network.

One thing you can bet on, if your customers are not there now they will be in the near future.  Or, stated another way, why wouldn’t you want to have a presence where your customers are?

Perhaps you have made decisions about adjusting your staffing and business model to the challenges of the current environment. Social media programs provide a way for you to deploy more resources and effort into your distribution and marketing efforts without assuming a lot more cost.

Even in uncertain recovery, many smaller businesses like yours are committed to expanding their presence, yet have little appetite for going back to business as usual.

The pattern that characterized the emergence from similar market environments in the past is not being repeated. The cycle of down-sizing and staffing up has been altered as decision-makers look to boost production and distribution through technological innovations.

The new paradigm is simple: Always Be Connecting.