Investing + Influencing: How will the story end?
Russell Andrews, Global Head of Advice Solutions, SEI Asset Management Distribution, writes that when news broke of the surprising surge of trading activity in the newly-termed ‘meme stocks’, it turned a small yet growing trend of social media-influenced trading patterns into a media phenomenon and a mainstream talking point. Since then, the debate has raged, and even regulators have weighed in. But the question remains: how will the story end?
At first, and when taken at face value, this looked to have the potential for a new-age cautionary tale, considering the risks of combining unfettered access to securities trading and the growing role of the unaccountable yet increasingly powerful influencers. In the same way that ‘Frankenstein’ tells the story of how a scientist unwisely created a monster, the main concern centred on the fact that some of the world’s biggest financial institutions and social media platforms were independently—and perhaps unintentionally—creating a metaphorical monster of their own. One that could make millions for the few and burn through savings for the masses.
If left unaddressed, this dramatic yet arguably realistic outcome holds up. However, the flip side is what could happen if social media were used to drive more positive, long-term outcomes for savers and investors.
This is a big opportunity for financial advisers. We should be using it to identify ways to maintain the social media-driven market and investment interest, while introducing a professional fiduciary perspective.
There is an important distinction between trading and investing. Both have the goal of making profits, but they pursue that goal in different ways. Trading is typically about identifying short-term opportunities to buy and sell shares in a single security and make money through potentially isolated events. However, investing focuses on longer time horizons, is often based on more structural or fundamental sector or market level circumstances, applies greater levels of portfolio diversification, and typically carries a lesser risk/return profile.
Advisers and investment firms can leverage the meme stock-driven uptick in retail trading activity to help educate those who have recently taken to following trading “influencers” across their social platforms. This initial experience, if done well, could be the basis of a relationship (most likely digital), which introduces the value of having a fiduciary in your corner who is truly advocating for your needs, wishes and risks.
By its very nature, democratisation is a positive for investing, because it provides access to markets that have historically been difficult to access for young, inexperienced retail investors. However, offering unadulterated access to securities all over the world with few or no safeguards presents a risk that can outweigh the reward.
For some, seeing the latest trending stock and its monumental shift in valuation may feel liberating and exhilarating. But without the appropriate knowledge and experience, it’s not so different than heading to the roulette wheel.
It’s more important to create a safe environment for those who are engaged, have excess income and savings, and have a time horizon suitable for investing to be able to access a fiduciary-based investment proposition that can ultimately serve their needs and fulfil their ambitions.
Now, the challenge is addressing the well-publicised advice gap and the inherent inability for advice firms to profitably support clients with fewer assets. The answer lies in technology and innovation.
Applying a fiduciary lens doesn’t just mean expending time and effort curating lifetime investment strategies. It can start by simply educating and curating access for new clients in a way that is expert, robust and aligned with their personal circumstances.
As an industry, we have a significant opportunity to create a positive impact by engaging with a new cohort of social media-driven investors.
Advisers are in the strongest position to affect this positive change, with deep experience in distilling the needs, interests and risks of end clients and converting them into suitable and appropriate investment recommendations. That is the foundation of fiduciary oversight.
Each stakeholder plays an important role. Trading platform providers can create greater controls and build links to relevant financial advice, technology providers can develop solutions to digitise advice and client advocacy, and investment managers can create innovative solutions to appeal to a new wave of investors, while retaining strong risk controls.
Without taking action, nascent traders may end up struggling with the perils inherent to aggressive equities trading, while advisers miss a crucial chance to appeal to an entirely net-new client base of young and engaged investors—a genuine unhappy ending.