During the Stay Home period to combat the Coronavirus outbreak, we’ve all found ourselves with more free time. Many people have taken this as an opportunity to cultivate new interests. Of course, you should be proud of the initiative, and social media is a natural home for sharing what you’ve learned.
One trend you may have also experienced is the sharing of investment advice. You know the scenario: someone you haven’t talked to since high school opened his first Robinhood account last week and he’s got a hot stock tip to share on Facebook. He hasn’t lost yet and he’s doing YOU a favor by sharing his ideas. Besides his not having been an investment professional before a market roiled by pandemic volatility, this is alarming for several reasons.
If you’re like me, you have probably done your best to just ignore these distractions to your original goal of seeking out amusing memes. But as an investment professional, I do feel the need to highlight the reasons why it is also prudent to do so. To make a very tired analogy, there’s a reason why your doctor isn’t also giving serious blanket medical advice via Facebook. Sure, wash your hands, but don’t take a specific dosage of antibiotics without a proper diagnosis of your condition.
There are a host of laws and regulations that financial institutions and advisors must comply with, and for good reason. This is why the compliance function exists. Namely, a couple of important factors to consider:
Suitability
When advising an investor, the advisor is required to ask “is this investment appropriate for my client?” At the most basic level, this means that any investment recommendation is in line with the client’s objectives and risk tolerance. That’s why we do so much work up front, asking you questions in an effort to gauge your responses to your risk.
This is exactly what the Facebook post isn’t doing. Without regard for your personal financial situation, goals, or feelings about risk, there is no way the advice can meet suitability requirements. These types of blanket recommendations, regardless of whether they’ve been profitable personally, are incredibly dangerous. If an investment’s volatility affects your ability to adhere to your overall investment strategy, it can quickly offset its other potential returns.
Have you ever noticed why the disclaimers on things you receive from investment professionals are so long? It’s not just a case of over-lawyering; it’s because there are very specific requirements that we must meet for the investor’s own protection. One piece of common disclaimers that illustrates this particularly well is that you need to always “contact your advisor if there are any changes to your financial situation or investment objectives.”
However, just meeting suitability is not the stopping point.
Fiduciary Responsibility
Many advisors, including Certified Financial Planners™, take the seriousness of this requirement one step further. They adopt a fiduciary standard in that their advice given to clients must be in the client’s best interest. This goes ahead of their own personal interests or their firm’s interests. They can’t even buy securities in their own account before recommending them or buying them in client accounts. They must gather accurate and complete information and use it in generating their advice. They then must follow best execution practices in implementing this advice.
Does the person on Facebook have this same commitment to the recommendations he’s doling out? When life normalizes and the demands of his regular profession resume, will he continue to monitor the trades he has been proselytizing? Will you even know if he loses interest and decides to pack up his investment portfolio to buy a scratch-off lottery ticket?
These are just some of the reasons that separate professional financial advice from the generic and unqualified information that can be found all over the internet. It’s also why the investment field is so highly regulated, and rightfully so. The potential consequences to individuals can be catastrophic otherwise.
