Steph Willcox: ‘It’s not financial advice’ may not be enough

If you’re on social media, you’ll have seen sponsored ads pop up where someone dressed extravagantly, or posing in front of a private plane, offers to show you how to put together an investment portfolio to turn your meager savings in millions, always cautioned in the same way “this is not financial advice”.

This is, of course, an attempt to distance themselves from regulation and assert that they do not provide regulated financial services. Providing financial advice where you are not regulated to do so falls under Article 23 of Financial Services and Markets Act 2000 and could result in a fine or up to two years in prison.

Lessons from the GameStop saga

The GameStop saga that unfolded around the world in the first quarter of 2021 was, in part, started by an American, Keith Gill, a FINRA-registered representative working in marketing for an investment brokerage firm.

Keith Gill posted under the handle “Roaring Kitty” on YouTube and Twitter and a less printable name on Reddit.

His first post on Reddit, in September 2019, simply displayed his position in GameStop calls, a $53,000 investment that he called YOLO. The subreddit he posted in, WallStreetBets, is not a place to invest sensibly. Subscribers often idolize those who have won and lost millions and this type of bet was regularly posted on the site.

The pursuit of the big win will always come with losses

Keith Gill received a lot of negative comments on his early posts, with people largely expecting him to have lost everything by the time the January 2021 calls were due to expire.

By the time January 2021 rolled around, Keith Gill’s portfolio was worth $7 million and everyone wanted a piece of the action, putting a short squeeze into action by forcing anyone holding put options on GameStop (mostly large hedge funds) to cover their losses by buying shares at any available price.

At the time GameStop trading was abruptly curtailed, Gill was sitting on a wallet worth $48 million. His last update in April 2021 showed he hadn’t sold any of his portfolio (in fact, he had added more GameStop stock), with a total portfolio value of $34 million.

Regulated liability of the employer

At no time during his days of posting on Reddit or his lengthy YouTube videos did he encourage others to follow his investments, he constantly presented his own opinions and research and said his videos were ” for educational purposes only”, but he worked for a broker. until January 28, 2021, when his employer was alerted to the videos and his employment was terminated.

Pmaybe just labeling your opinions as “not financial advice” won’t be enough to protect you if the regulator comes calling you

His employer, MassMutual, was eventually fined $4 million for failing to supervise his employees’ use of social media and Gill himself lost his FINRA license and faced a lawsuit alleging that he had violated securities laws. This lawsuit was dismissed two months later.

So maybe labeling your views as “not financial advice” won’t be enough to protect you if the regulator comes calling? What if your investment advice is causing people to lose money?

Ultimately, if someone tells you to buy a stock, bitcoin, or other cryptocurrency, they are likely to benefit financially from you following that advice, whether or not you derive financial benefit from it. . This form of “financial advice” directly benefits the promoter more than those whom it proposes to “help”.

FCA and high-risk investments

Obviously, this is where advisor regulation and, indeed, regulation that ensures clients are treated in their best interests, like the new Consumer Duty, comes in. Being transparent about advisor costs after the RDR is a world away from the hidden profits that those who promote their own agendas will receive.

The FCA recognizes that many consumers invest in high risk products which do not match their risk tolerance and are unlikely to meet their needs and have tightened their rules around high risk investments with the introduction of PS22/ 10.

This includes differentiating the journey a client will follow when choosing to invest in high-risk products versus traditional investments in order to provide some friction to the acceptance of a high-risk investment.

The importance of recognizing where you get your financial advice cannot be underestimated. You may have heard of your mate’s next ‘sure thing’ at the pub, but I’m sure you’ve heard of another hundred that never happened either.

The pursuit of the big win will always come with losses, and a well-diversified multi-asset portfolio is much more likely to adjust to your personal risk tolerance and loss capacity, and that’s where real advice funds are so precious.

Steph Willcox is Head of Actuarial Implementation at Dynamic Planner

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