After the recent GameStop saga, the spotlight is understandably on retail investors. With interest rates at historic lows and millions facing financial uncertainty in the face of the pandemic, young investors are looking for returns and alternative ways to invest their money.
A report by behavioural finance firm Oxford Risk has found that a fifth of younger investors now say social media channels are the most important sources of information for managing their investments. It also found that roughly one in ten investors now use social media platforms to inform their investment decisions.
The use of social media for investment advice can be risky for both investor and advisor We set out some key considerations below.
Three things to look out for, if you are using social media platforms to inform your investment decisions:
- Fraud. Action Fraud has reported that there are a number of 'clone firms' scamming investors. 'Clone firms' are set up by fraudsters using the name, address and 'Firm Reference Number' of real companies. They often take out adverts on social media platforms. Once victims register interest, they'll be contacted by a fraudster, sometimes imitating genuine employees, but with very subtle changes (think "vv" instead of a "w");
- Always check the FCA Register to check the company you are dealing with is legitimate and is authorised. The FCA also has a warning list of firms you want to avoid; and
- Unlike taking investment advice from traditional means (such as an independent financial adviser), financial commentary on social media might be given without the appropriate regulatory approvals. It also may not be as independent as it appears to be. Both of these factors could limit an investor's recourse, should things go wrong.
Three things to look out for, if you are using social media platforms to provide investment advice:
- Communications through social media can reach a wide audience rapidly, so you must ensure that any communication is clear, fair and not misleading, even if it ends up in front of a non-intended recipient. In particular, you cannot over-emphasise the benefits of a financial product and provide inadequate risk warnings;
- Assess whether you are providing a financial promotion. This is an invitation or inducement to your viewer base to engage in investment activity. The FCA includes YouTube, Instagram and Facebook (amongst many others) as platforms that are capable of inducing customers to invest. For example, providing the wording "FirmXYZ offers the best returns!" is encouraging recipients to invest; and
- If you provide content that includes signposting language to encourage the recipient to open a link (you may be receiving a commission for them to do so), this link must be FCA compliant. The wording "to see our top-performing UK equity fund, go to www.Firm XYZ.co.uk” is non-compliant as the phrase 'top-performing' introduce an element of inducement and will constitute a financial promotion.
If you are found to be providing investment advice or providing a financial promotion without FCA authorisation, enforcement action can be sought against you.
If you are concerned about any of the above points, James Kaufmann can provide you with specialist advice on what you need to do to comply with these regulations.