Should celebrity profiles be considered investment advice?
Investing apps allow investors to trade securities and share those strategies with like-minded traders. Regulators may need to consider whether they're also providing investment advice.
Mobile investing apps exploded in popularity post-pandemic and some analysts say they could draw hundreds of millions of new retail investors by the end of next year. That meteoric rise is attracting the attention of lawmakers and regulators, who are now asking how these business models work, and more importantly, how they impact consumers.
Free online trading apps give clients the ability to trade almost anything from individual stocks, to options to cryptocurrency, and use client data to make suggestions about suitable investment products. In a speech last week, Securities and Exchange Commission chief Gary Gensler wondered what effect these behavioral prompts — like encouraging clients to trade more often or steering clients into high-risk, high-fee products — have on investing outcomes.
“When do these design elements and psychological nudges cross the line and become recommendations?” Gensler said.
The answer is fundamentally important to the future of advice and could change the fiduciary relationship these companies will owe clients under securities laws moving forward. “Even if certain practices might not meet the current definition of recommendation, I believe they raise a question as to whether there are some appropriate investor protection guardrails to consider, beyond simply the application of anti-fraud rules,” Gensler warned.
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Being a diligent pundit of adviser tech, I opened an investment account with Public.com last week to see if I, too, could be nudged.
Besides the realization that I’m not cut out for day trading, the major takeaway for me was how much the app looked and felt like Twitter. There are online profiles complete with profile pictures, sharable investment portfolios and news feeds full of recent trading activity highlighting gains and losses. The platform already boasts about 1 million users and when they open the app, the first thing they see is other investors talking about their investments and sharing stock picks.
The app even gives users visibility into the profile and watchlists of high-profile celebrities also using Public.com, like NFL player Bobby Wagner and WNBA athlete Kayla McBride, so users can invest like their favorite personalities.
The social-media-driven upstart is part of a growing swell of support for apps that not only allow investors to trade all sorts of securities, but lets investors share and connect with like-minded traders. Recent entrants like eToro USA offer similar experiences.
The next question Gensler and company will likely ask: Does sharing the portfolio strategy of a high-profile investor to potentially hundreds of thousands of followers count as a recommendation?
It certainly feels like one.
The influence that a single tweet can have on the markets was evident earlier this year when Tesla Inc. CEO Elon Musk — who sports nearly 61 million followers on Twitter — tweeted about GameStop Corp.’s stock leading it to surge 93% on a single day last January.
For Musk, his social media activity has already been heavily scrutinized and particularly his discussions of cryptocurrencies like Dogecoin, which has exploded almost 10,000% since October 2020 thanks in large part to his tweets, according to Forbes.
Gensler will need to look at these practices to make sure any necessary guardrails are in place to protect investors when celebrities use social networking to endorse certain stocks or asset classes.
The commission recently concluded a public comment period on digital engagement practices and the popular trading app Robinhood, and the company that owns it, Robinhood Markets Inc., has already submitted a letter warning the agency that new rules will face challenges in court.
Digital platforms have done wonders upping the user experience and attracting a greater number of participants into the markets, and that has opened up a whole new cohort of investors that would have otherwise been excluded. But, these new apps certainly come with new avenues for conflicts that may have to be recategorized and defined.
The ease that Musk moved the markets is an example of the power social media can wield on investors. It also demonstrates the potential for celebrities to manipulate the markets, moving in and out of stocks while using social media apps to tout those positions.
What Gensler needs to figure out is how to ensure retail investors won’t be left holding the bag.
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