There are a number of self-proclaimed experts making the rounds in financial advisory circles touting the advantages of social media for financial advisors. But not everybody has embraced the idea. So far, it seems advisors are decidedly split into two camps: those who view this type of communication as a tremendous opportunity and those who feel, like one keen observer who prefers to remain anonymous, that social media "is over-hyped and really appeals only to teenagers, a group of self-promotional buffoons and politicians afflicted with acute narcissism."

Because of the broad array of tools that fall under the "social media" heading, some advisors are not able to differentiate between them. The term might conjure up thoughts of Facebook or Twitter in one advisor, while another might think of LinkedIn, a blog, a wiki, a podcast or even a YouTube video. All of these are, in fact, forms of social media, but not all of them will necessarily be ideal tools for a financial advisor.

Still, the power of these channels cannot be ignored by advisors. According to Opera Software's "State of the Mobile Web" report, Facebook usage grew 619% over the previous year among Opera Mini users globally, while Twitter usage surged an eye-popping 2,859%. According to a January 2010 Sysomos study, 50.8% of Twitter users currently reside in the United States. Another recent study claims that there are 75 million Twitter users worldwide, although only about 17% of them, a little less than 13 million, are active users.

Facebook claims that it currently has 350 million active users, 50% of whom visit it on any given day, and the average user spends 55 minutes each day on it. LinkedIn, a networking site targeting professionals, claims more than 55 million users in more than 200 countries and territories. The company also says that executives from all the Fortune 500 companies are LinkedIn members.

Clearly, social networking sites are attracting a crowd of potential prospects and collaborators. What's less certain is whether advisors can capitalize on the social media phenomenon, and if so, how.

Though these outlets hold promise, for financial advisors a healthy dose of skepticism is in order. The advantages might be obvious, but the risks are discussed less often and are less understood by financial planners.

One of the first things to ask is whether you are staying within the graces of regulators when you disseminate information through these types of media. According to Bob Veres, a veteran industry observer who counts among his Inside Information community many of the best advisors in the nation, "The primary social media concern among advisors is compliance." The good news is that in January, FINRA released Regulatory Notice 10-06, which offers guidance for using blogs and social media Web sites. The bad news is that until it becomes clear how the regulations will be interpreted and enforced, uncertainty remains.

FINRA's previous guidance on electronic communications, which applies to social networking sites such as Facebook, LinkedIn and Twitter, requires firms to hold on to social media records when they are related to a B-D's business. Today, we are only aware of a few firms that archive Internet information for financial advisors. One is SMARSH (www.smarsh.com), a firm that many advisors already use for e-mail archiving. Another is Arkovi (www.arkovi.com), a new firm that recently launched a beta version of its software for individuals and small businesses and has a version due shortly with enterprise backup systems. Socialware (www.socialware.com) already offers an application targeted at enterprises that includes risk management and compliance tools.

Another consideration when dealing with these sites is the "Books and Records" rule. FINRA Rule 3110 and SEC rules 17a-3 and 17a-4 apply here. Status updates and tweets fall under the guidelines for advertising or sales literature, while in-network e-mail (offered by Facebook and Twitter) or in-network instant messaging can be considered correspondence.

Section 206(4) of the Investment Advisers Act includes prohibitions against certain types of testimonials. Sites such as LinkedIn allow clients to post advisor testimonials, and they also allow advisors to "recommend" others. If an advisor were to recommend a product or service unrelated to financial services, it is unclear what, if any, repercussions there might be. However, if an advisor were to recommend specific financial products or services, the risk would be much greater. By the same token, if others post public testimonials about an advisor it could trigger a regulatory response. 

One consensus that appears to be emerging among those who have read the new FINRA guidance is that Twitter may become more attractive because the guidelines say that dynamic content such as Twitter postings (a.k.a. tweets), posts on Facebook walls and posts on LinkedIn discussion boards do not need to be pre-approved by a compliance officer. By contrast, static content (LinkedIn profiles, blog posts and the like) must be pre-approved.

There are other regulatory issues for social media beyond the scope of this article. Our goal in bringing up compliance is simply to point out that you need to know the rules and understand the risks before diving into Facebook or Twitter. Fully understanding the regulatory implications of a social media campaign will require some commitment of time and money. At this point, the commitment may not be justified for everybody.

Another risk of using these sites is that they might do some harm to your reputation. If you mix your business and personal life on a social networking site (and it is sometimes difficult to separate the two) you run the risk of creating an online persona that is not appealing to prospective clients or business associates. An unflattering picture or an off-color remark can damage your image among business associates. While some would argue that adding a bit of your personality to your tweets is a good thing, you have to be careful not to turn people off. Do your vendors, clients and prospects really want to read that you are now in the supermarket, or taking a walk with your toddler? I think not, but judging by the tweets I've read, some advisors apparently disagree with me.

It will also take a lot of time and planning to develop a strong presence for yourself online, at least an hour a day, and more likely longer than that. Constance Stone, a CFP and ATP licensee at Stepping Stone Financial, says she understands the usefulness of social networking, but some of these problems concern her.

"I get it," she says, "I just don't know where others find the time! I also don't feel comfortable sharing personal daily thoughts and experiences and/or have the time to write often enough to make it a viable tool for me. That is a reflection of my personality and values, not a judgment on others that do engage in the use of social media."

If you are an employee, even if you try to keep your business and private online personas separate, your employer may be watching you. According to the National Workrights Institute (www.workrights.org), some employers monitor their employees' blogs. Employers may even monitor a worker's home computer when he or she logs on to the corporate network, when the home computer temporarily becomes a part of it. Under some circumstances, that might open the door for an IT person within the firm to access all of the employee's personal data.

The institute's Web site offers numerous examples of data that employees thought was private being used against them by an employer.

What you don't know can hurt you. Some Twitter users try to automate their tweets. This results in a fair number of messages, which can raise your Twitter profile, but also result in gaffes if your automated feeds generate unexpected results (for example, when tweets designed to capture news about Schwab's PortfolioCenter application also generate unintended tweets about a design school by the same name in Atlanta).

We don't want to be too negative about social media. If used right, it can produce positive results. Our point is that you must do your due diligence first, and most advisors to date are having trouble getting the proper guidance.

"We'd like to use social media, but we've yet to discover reliable how-to advice," says Amy Thomsen, of Sharkey, Howes and Javer, a planning firm in Denver. Thomsen recently participated in a Webinar on the topic, but she did not feel it provided her with the information she needed.

Louis P. Stanasolovich, founder and CEO of Legend Financial Advisors, says he is not doing much with social media for the same reason. His firm has a presence on Twitter, Facebook, LinkedIn and a number of other sites, but for now, he is only using them to announce speaking engagements and radio appearances.

Meanwhile, Tim Maurer, a CFP with Financial Consulate Inc., has been posting videos on YouTube with great success, and he is using social media to promote his new book, The Financial Crossroads (www.thefinancialcrossroads.com/cms/).

Steve Wightman, a CFP with Wightman Financial, uses social media for both his personal and business pursuits, though he strives to keep them separate. (Because he's the principal of his own firm, he doesn't have to worry about privacy issues with his employer.)  For personal use, he likes the online functions that allow him to update all of his friends with a single message. When he's doing business, social media allows him to network and share expertise with professional groups quickly and efficiently anywhere he goes.

Among those advisors I speak with who use or want to use social media, there are two main camps: those who want to network or generate interest in a specific product or event (such as a book or an appearance) and those who want to use it strictly as a client prospecting tool. The feedback so far indicates that those attempting the former are doing better than those hoping to do the latter. This is not surprising. In order to attract clients, your social media presence needs to be part of a well-designed, multifaceted marketing plan. Since the majority of advisors put little thought or planning into their marketing, it is unlikely that Twitter or LinkedIn will change things. Only those who plan and execute properly will succeed. But it is an open question at this point whether the considerable effort might be better spent elsewhere.

A few advisors say they like social networking simply because it gives people another way to find them online. For example, many people now use tools that allow them to search Twitter, LinkedIn and Facebook. If potential prospects can discover your profile on LinkedIn or see a video you've produced on YouTube, it might lead them to contact you or visit your Web site for more information. If you are careful about what you put in your profiles and mindful of regulatory no-no's, this could be a simple, low-cost, low-risk way of gradually entering the social networking arena.

Social media sites hold great promise, and the advances in software-not to mention hardware such as smart phones, tablet computing and auto computers-means these sites will be used more in the future. But we work in a highly regulated industry. In the wake of recent financial scandals, regulators are not going to look kindly upon those who, innocently or not, violate the rules. Our advice is to move slowly and cautiously, and to carefully vet any "social media experts" before following their advice.