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Investment Advice Through Social Media – The Red Flags

By Karen E. Treml

While financial tips and advice are plentiful online, locating useful advice tailored to one's financial needs and risk tolerance is not always so easy. In fact, some of these seemingly helpful tips can be dangerous, says Bob Stammers, director of investor education at the CFA Institute.

internet and money symbolsIn the past, information had its own value, says Stammers, and the real skill was getting the information. Now, with the advent of the Internet, it is really the skills that have changed. It is not a matter of whether you can find the information, it is a question of how does one parse the valuable information from the 'noise.'

"The Internet is a great place for information, but it is not a great place to get advice. When I say advice, I am really talking about a customized planning strategy that you would get – and that you should only get – from your investment advisor," he says. One big reason for this is because the information from social media sources is just too general for most people. "We try to tell people to stay away from any kind of social media advice. Where the Internet and social media can provide a lot of value is in getting facts and opinions or commentaries, not advice."

Facts Or Underlying Agenda?

People should always find the source of the information they are reading and ensure they check the facts. Do not just take it at face value that someone is giving you information that is correct, says Stammers. Understand the underlying agenda of the person giving the commentary. Does that person have the requisite experience and education to be providing that commentary? That is an important question.

"For example," says Stammers, "I write a blog and I write for Forbes. We also have a blog here at the CFA Institute called 'Inside Investing', which is for individual investors. What is interesting is that since I started writing for the institute, my LinkedIn profile is getting hit constantly. What that is is people checking up on me and doing the requisite research on me to make sure that I have the experience and education to be saying what I am saying. What they are doing is reducing their risk of getting false information by at least following up on me."

The Securities Exchange Commission (SEC) and the Investment Industry Regulatory Organization of Canada (IIROC) periodically issue warnings about people offering online information and advice and selling so-called 'high-yield income products'. Many of those selling these products are unlicensed. If people who bought those products had checked with the regulatory bodies, they would have found that the sellers were not licenced and that would have kept them from buying products that were basically scams, says Stammers.

Illusions

Further risk lies in the online ability to create an 'illusion of consensus.' What happens is that people running scams, such as Ponzi schemes, have other people involved who are 'in the know.' These people are used to create the illusion of consensus, says Stammers. This is an important element to the scheme. In a Ponzi scheme, returns are paid to investors from their own money and/or the money put in by subsequent investors, not from earnings. This scheme attracts investors by proposing higher returns than other investments – typically abnormally high short-term returns. This requires continual and increasing flows of money from new investors in order to perpetuate the scheme, because if (and when) the payments to investors become greater than the inflow of money, the scheme will fall apart and the existing investors lose their money. Thus, to keep the scheme going, and in an effort to attract ongoing investors, those running Ponzi schemes create an illusion of consensus using the people who are 'in the know' to write online reviews purporting how good the investment is and that they are making a lot of money. The perceived consensus attracts more investors. And while reviews can be great, care must be given to understand the agenda of the people providing that information.

Stammers says if someone is advertising returns that are too good to be true, most likely they are too good to be true. If someone is asking for fast action, saying the opportunity will be missed if the investor does not act now, this is a red flag.  If there is a true opportunity, there is no reason anyone would have to act quickly. If anything, if it is a true and honest product, the seller should be asking the investor to take their time, get a prospectus, and understand the risks involved. They would provide all sorts of disclosures to make sure the risks being taken are understood before anything is purchased. Anything other than that should set off some alarm bells, says Stammers.

The Tools

When it comes to investing, first and foremost, people need to get a financial education. "Once you have a financial education, you can start to see things, you can start applying some common sense, and you can understand more about what the benefits and risks of the products are. You need to keep learning until you are comfortable that you understand the information related to whatever it is that you are following," he says. "For example, you might get a general education in finance but then you want to go and invest in real estate. Then you should probably bone up on real estate as well. It really comes down to how comfortable you are. Do you understand the benefits and risks? Once you do that, then I think you can go ahead and start investing."

Secondly, question what you read. Does it make sense to you? Is there an agenda there? Are people providing commentary for a particular reason or is the commentary non-biased, coming from someone that does not have an agenda? There are lots of people out there that use financial information to sell not just financial products, but to sell other things. "I tell people if you see something that is written as a financial commentary and then there is a link that takes you someplace that sells widgets, then I do not know if I would put a lot of trust in the information you are getting," says Stammers. Then again, if you are getting that same commentary and you are being sold a financial product, it should make you do the additional due diligence. "Get a second opinion from someone else in the industry, your financial advisor, or someone in investment management. Ask them 'does this make sense to you? What do you think of this commentary? Is this something that I should be putting value on?'"

Staying Out Of Ditches

At the end of the day, the Internet is a great place to get information, says Stammers. "The CFA provides information on the Internet and it uses social media to promote it. We do not want anyone to think that it is not a place to get commentary. But, use common sense, get some education, and if you do not feel comfortable, get a second opinion. Do your due diligence, and when you are looking for commentaries, find those people that think like you do, that ask the same questions.

"It is also about investment philosophy. Look for those people that invest or think like you do and look to see if they have a following. You can join a community of people and use them to further your education as well.

"Following these steps should keep you pretty much out of the ditches," says Stammers.

Karen Treml is staff writer for Private Wealth Canada.

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