Advisers sometimes ask me, "Do I really need to be on social media?" Usually their problem is the time it would take them to do it properly, and they don't feel comfortable outsourcing their social media management to a specialist provider.
My answer is always the same. For advisers, being on social media is essential, for two main reasons. The first is a commercial one. The best and fastest-growing firms almost invariably have a social media presence. If you don't have one as well, how do you expect to be able to compete with them? How are prospective clients going to find you? And, if you plan to sell your business eventually, how interested are potential purchasers going to be if you don't have an online audience?
But the second reason is perhaps even more important. Social media provides advisers with the opportunity to help people, not least their own clients and prospects, to achieve better financial outcomes. It's a chance for advisers to inform and educate, to make people feel more comfortable about investing, and to discourage them from acting irrationally when market volatility strikes.
What makes it even more important that they have a social media presence is that social media is where many investors, including those with advisers, are led astray. Every day, social media users are bombarded with information which at best is not very helpful, and at worst inaccurate and downright misleading. They need the help of good advisers.
April Rudin has just written a paper on this subject for The Investments & Wealth Institute, entitled Understanding How Social Media Affects Investor Biases. April is based in New York City. Her firm, The Rudin Group, designs bespoke marketing campaigns for financial advice firms.
As April explains in her paper, there is evidence of a strong link between social media and the way that investors behave. Research by LinkedIn found that a quarter of high-net-worth individuals in the United States turn to social networks for financial purposes, including looking for information on which to base an investment decision.
April's central thesis is that social media accentuates investors' biases. This should come as little surprise to anyone who has followed UK or US politics on social media over the past three years. I'm sure there are examples somewhere of people who started off disliking Donald Trump but, as a result of social media, ended up liking him; but there must be relatively few. The same applies to Brexit; spending time on social networks is only likely to make us even more entrenched in our existing views.
Confirmation bias is certainly rife on financial Twitter (often referred to by my Stateside colleagues as #FinTwit). I know from personal experience that trying to persuade a fellow social media user that they should look into the benefits of indexing when they've spent years advocating active management is a waste of time and energy.
I confess I have to hold my hand up on this one too. I tend to mute followers who repeatedly post unintelligent remarks; the rude and abusive ones I usually block, regardless of who they are.
Herding, April Rudin explains, is another bias that social media tends to exacerbate. Humans are very social animals. The thought that anyone else is doing something that we aren't doing ourselves makes us feel uncomfortable, especially if we think we're missing out on a financial reward.
As April says, that's why people who know what they're doing will post things like, "Three investment trends you're missing out on", or "Making this millionaire's secret work for you". It can be hard to resist clicking on a link like that.
Of course, the problem with joining the stampede is that you could be investing when it's too late to benefit from the potential rewards. Also, it might be perfectly OK for one investor to follow a particular trend, but just the wrong thing for you to do.
Finally, the article touches briefly on overconfidence. Again, it seems only natural that social media should make us more confident about pursuing a particular course. We might, for example, start off slightly unsure about investing in a particular fund or sector, but watching lots of other people, seemingly just like us, doing precisely that can make us feel emboldened.
Lessons for advisers
What, then, are the lessons for financial advice firms? Social media might not be conducive to better investment outcomes, but it is part of modern life. It's clearly unrealistic for advisers to recommend that their client abstain from it.
"Financial advisers," April concludes, "can hope that with time every investor will become more internet savvy, ready to filter out the bad information and absorb the good. Sadly it seems that it will be quite some time before that happens."
That's not to say, though, that advisers can't help their clients to be more discerning consumers of social media. As April says, "advisers should speak with clients about prioritising the quality of the information they consume over the quantity."
They should encourage clients to use social media with their eyes wide open, to be aware of their own biases, and to remember that every headline, blog or tweet conveys the bias of somebody else.
But, crucially, they also need to be on social media themselves. Social media can be a daunting and, yes, a lonely place. Clients and prospects need all the genuine friends they can find.
April's paper is a fascinating read and I commend it to you:
Understanding how social media affects investor biases
ROBIN POWELL is a journalist and runs Regis Media, a content marketing consultancy for financial advice firms. You can follow him on Twitter at @RobinJPowell