Can you depend on a financial regulator to save you from making a bad investment?
The answer is a resounding ‘no’ and not just for the obvious reason that a regulator almost never steps in with a ‘get out of jail’ refund cheque when your investment turns out to be a wipeout.
In many ways, the financial regulators are usually two or three steps behind what is happening in the real world and when they do get around to regulating a troublesome area, the intervention can throw up other problems by dissuading innovation.
It is far better to ensure that you thoroughly research all investment opportunities yourself because that is part and parcel of the investment process and is not something you can afford to delegate to a friend – and especially not a regulator.
The most you can really hope for is that financial regulators help to ensure a transparent and well-informed market and that they help to eventually put the nefarious operators out of business and possibly behind bars – although by then it is usually far too late to get your money back.
Scrutiny of social media ‘finfluencers’ is way overdue
A great example is the Australian Securities and Investments Commission (ASIC) decision to review the activities of some Australian finance influencers, as it begins to check out what is happening in social media.
Anybody who has clicked on a mouse in the past decade will have come across all sorts of financial influencers ranging from the straight-out spruikers, conmen and frauds all the way through to some excellent and well-meaning help around financial and investment education.
Until now, the onus on working out whether the person offering ideas about investing in cryptocurrencies or shares is operating a ‘pump and dump’ scheme or is genuine has been almost entirely with the consumer.
It is true that it is an area ripe for some sort of regulation, but the point is that in this case the action is coming far too late to protect many consumers.
Pandemic created millions of new investors
That is particularly the case given that the pandemic saw around 2.5 million Australians start investing for the first time, according to Finder data, with many of them putting money into cryptocurrency.
Many predominantly young investors have done well by doing thorough research and either choosing to go with an adviser or doing it themselves through diversified investments such as exchange traded funds (ETFs) through online brokers.
ASIC said it is now examining the activities of some “selected’ financial influencers on social media platforms such as TikTok after finding that their activities are an “area of concern.”
Responding to oversight questioning recently, ASIC replied that: “We are currently undertaking a review of selected financial influencers (‘finfluencers’) to understand their business models and how the financial services law applies to this activity.”
“Our selection of finfluencers is not targeted specifically at TikTok, although it is being included in the review as we note that some of the finfluencers have a presence on TikTok.”
That is thought to also include some of the closed messaging apps like Telegram that have been successfully used to promote pump and dump schemes, in which the promoters spruik a stock and then cash in by taking profits if the idea gets some traction among a large group of investors.
Scams are everywhere
Cryptocurrency scams have become very common with the Australian Competition and Consumer Commission (ACCC) estimating that Australians lost $70 million in investment scams in the first half of this year alone, with half of that being lost in a variety of cryptocurrency scams.
There is no magic way to avoid seeing these scams but most of them revolve around super high returns with low risk, the use of fake celebrity endorsements or the use of advanced algorithms that “guarantee” success.
The general rule is that if something sounds too good to be true, it probably is and you need to independently check out everything that you find online well before you start sending money anywhere.
Some finfluencers are paid to push products
ASIC told the oversight hearing that “some of the finfluencers appear to be providing advice and are getting paid by other financial product providers to promote their products” – pointing out that most do not hold an Australian Financial Services Licence that requires them to act honestly and fairly or have any sort of capital buffer set aside in case of investor loss.
“We are concerned that inexperienced investors may be increasingly acting on financial advice from unlicensed providers,” ASIC said.
“This may result in conflicted or poor advice being provided to users who may suffer financial loss.”
In other words, the social media space has been operating as a sort of wild west of financial advice for many years while the regulators were busy cracking down on other areas such as financial planning.
Arrival of the sheriff doesn’t solve anything quickly
At last, the sheriff might be appearing on the outskirts of town but don’t expect any action to rein in the worst excesses of finfluencers for a long while yet.
By the time all of the inquiries are made and the regulations are all in place to help rein in the worst of the finfluencers, many more investors will have lost their shirts to bad players.
It may be that existing laws can be used to pressure dodgy finfluencers but that may also have the effect of stalling the progress of genuinely helpful finfluencers as an unwanted by-product.
In the meantime, the best advice for anyone seeking out opinions on the internet is to make sure they do plenty of research from different sources before putting their hard-earned money into any company share, cryptocurrency or other opportunity.
True investors don’t bet the farm on one idea
It is always good to remember that investing is not the sort of activity which works by backing a single idea or investment with everything to make a quick killing.
You can’t guarantee that sort of bonanza won’t happen but it is very rare and is the result of short-term speculation rather than normal investment activity which concentrates on diversification and long-term returns to produce good results.
That is not to say that investors don’t back new innovations in technology and areas such as technology and cryptocurrencies, but only with a small portion of their investment portfolio rather than effectively betting everything on black.
Avoiding scams and dodgy finfluencers is essential for investors and the best way to do that is to do your research really thoroughly and ensure you are dealing with legitimate brokers or other intermediaries.
As nice as it would be to rely on regulation to avoid all bad investments, the scammers and frauds are always a step ahead and avoiding them is always the job of the investor.