Financial Firms Turn to Social Media to Attract New Gen X, Y Clients

Retail brokerages and banks have increasingly been using social networking to attract and retain clients. But with social networking tools and sites proliferating, firms need to ensure that they connect with their target audience and provide content quality controls.

Why It's Important: Brokerages and banks will face the critical challenge in the next few decades of trying to retain billions of dollars in assets that will pass from longstanding clients to their Gen X and Gen Y children. In the hope of attracting these new investors and providing new communication services to their existing clients, a number of financial firms are actively tapping social media, according to Corporate Insight.

Where the Industry Is Now: Some financial firms, such as Zecco, are posting commercials and educational videos on YouTube, and many -- including TradeKing, Schwab, Zecco and Scottrade -- have created online communities that they proactively maintain. These communities are targeted primarily at self-directed investors and small-business users.

"Social networking is very important for traders teaching each other how to trade new instruments. ... Some of the smarter deployments of social networking tools employ experts as well," says Adam Honore, senior analyst at Aite Group. "Social networking left unchecked has little value, but if it's topic-specific, and you get experts whose opinions people trust, it adds another dimension."

While retail brokerages have been the social media hot spot to date, however, full-service brokerage firms haven't yet adopted social networking. Mutual fund companies in particular have been holding back. According to James McGovern, VP of consulting at Corporate Insight, compliance concerns and a conservative approach to the Web are holding them back.

Focus in 2009: The future of social networking lies in vertical online communities, experts say. For example, Charles Schwab recently unveiled its Schwab Trading Community, which is focused on its active trader clients. The closed environment offers traders the opportunity to connect with other traders.

For financial firms, ensuring that user-generated content is reliable is key. Sites such as Stockhouse, an online portal that enables investors to share information and investing success with other users, rely on editors as well as a proprietary reputation-filtering system to filter content.

"A lot of expert communities are being created," says Marcus New, president and CEO of Stockhouse. "At the end of the day, they are valuable for people who use them. Your broker isn't ... able to talk to you [as a friend would]. The community ... allows you to connect to other like-minded people in a private environment."

Industry Leaders: Scottrade, OptionsXpress, Vanguard, Wells Fargo and Zecco all have their own YouTube channels to present to potential new investors the investing ideas and tools that are available on their Web sites. Charles Schwab, TradeKing, Scottrade and Zecco also have created online communities on their own sites with user-generated content.

Technology Providers: Usually proprietary. While a growing number of brokerages have a presence on social media sites such as YouTube and Facebook, many are also building their own secure social media platforms for vertical communities of active traders and small-business owners.

Price Tag: Technology varies by firm, with costs starting from "fairly cheap" to upward of $2 million, according to one financial firm that contracted developers to build a social networking site that is scheduled to launch in 2009. Others use open source tools. "The real cost is the people managing the content," Aite's Honore points out. "In order to do it right, you either have to supply some marquis contributors or have an audience large enough to contribute enough value to the network. [After all], what would Facebook be if you could never actually find a friend on it?"

Even if you establish a self-sustaining network, someone has to monitor it to make sure there aren't people using your network for pump-and-dump schemes or other fraudulent behavior, Honore adds. "You also have to make sure there isn't some narcissist with an overinflated sense of the value of their investment advice over-contributing and annoying your other users."

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio