Is it possible to repair the breach in investor confidence through financial social media?

Paging through the Washington Post while drinking coffee on Sunday morning – it’s one old school media pleasure I don’t want to give up—I ran across an article titled, “The federal dragnet on Wall Street’s inside game.”  The article quotes Senator Ted Kaufman (D-Del.), chairman of a panel to review the Treasury Department’s $700 billion bailout of financial companies, as saying that insider trading “sends a clear message to people who want to invest in the United States that… I’m not going to get a fair shake in the market.”

How extensive is insider trading among some of most successful investment firms? According to the U.S. attorney for the Southern District of New York, it is “pervasive.”

So what’s the solution? I would argue there are two prongs: smarter enforcement and social media.

I can already hear the howls of derision. Social media? Is he nuts?

Let’s discuss the smarter enforcement angle first. As a former managing director of communications at NYSE Regulation, I know how hard it is to get rid of insider trading. There have always been wily people trying to game the system, and there always will be.

The regulators are constantly trying to step up their game. FINRA is reported to have sent a letter on February 8 to chief compliance officers of member firms, asking about controls to prevent distribution of material and non-public information within a firm and its affiliates, clients, and others. “Expert networks” are the latest twist in the insider trading game. These independent research networks pay for information on public companies, sell it to hedge funds and others, and are now in the crosshairs of investigation by the SEC and an element of prosecutions by U.S. Attorneys.

Evidence is that large numbers of people with money are afraid to invest and if they do, they are distrustful of their advisors. The financial crisis of 2008-09, Ponzi schemes, and insider trading all play a role. TheHearts and Wallets’ Quantitative Panel 2010 study released last November, concluded:

Sadly, 54% of Americans agree with the statement ”I am afraid of getting ripped off by financial professionals.” Only 24% of respondents rate their providers a 10 on a scale of 1 to 10 in trust. Most big firms score in the 20-30% range, but the best score of any major firm was 81% of customers rating their trust a 10, and several others are in the 40-50% range.”

So how does social media fit into this mess? Simple. It is a tool to develop better client relations. It doesn’t replace interpersonal contact, but adds to it. Social media is nothing less than a sea change in the way people communicate; it is immediate and personal and multiplies the number of relationships anyone can have in a single day. Over time, it offers insight into the personality and intelligence of the person behind social posts. It allows readers the chance to get to know the writer/advisor, to communicate and to evaluate him or her, and the firm as a whole. Bernie Madoff would have hated social media, since he never wanted to tell anyone anything about himself or what he was doing.

Because of the rules currently in place, investment advisors are frequently not allowed by their firms to use social media. This is changing. FINRA is creating an industry task force to get more creative, to rethink how financial social media applies to rules that designed for an earlier era.

Today it is possible to use social media to build a personal brand; to fill out the contours of the advisor whom an investor may see infrequently or not at all. An ever increasing number of independent financial advisors are doing just that. Through greater transparency and conversation, people may begin to trust again.

What do you think?