Bad apps + Bad actors = Bad news for advisors

The use of mobile applications, a type of software that runs on a mobile device and is known quite simply as an app, has exploded into the financial advice arena, with advisors’ customers of tomorrow most commonly relying on the applications to answer questions about their personal finances.

Emerging in the app landscape are two types of bad or worrisome actors for financial advisors to watch for. First is the financial predator who uses apps to do harm to investors and financial advisors’ clients; second is the phony financial advisor, who uses the nomenclature of financial advice to sell products and services that may not be in a client’s best interest.

Take the case of Steven M. Gallagher, whom the Securities and Exchange Commission hit with an injunction and asset freeze in the fall of 2021 for allegedly committing securities fraud through a long-running scheme to manipulate stocks using Twitter, one of the most popular and widely used apps across generations.

According to the SEC complaint, since December 2019, Gallagher used his Twitter handle, @AlexDelarge6553, “to make thousands of tweets encouraging his numerous followers to buy stocks in which Gallagher had secretly amassed holdings.”

“As alleged, Gallagher would then sell those stocks at inflated prices, while he continued to recommend others buy them — never disclosing that he was selling the stocks,” according to the SEC. Gallagher’s scheme had the earmarks of a classic pump and dump, touting penny stocks and earning himself tens of thousands of dollars in illicit profit, according to the Justice Department. He eventually pled guilty to one count of securities fraud.

Twitter and other social media apps appear to be fertile ground for such schemes, mainly targeting young investors who got their first taste of stock trading during the meme stock craze amid the Covid-19 pandemic.

SOCIAL ACCEPTANCE

According to a January report from Forbes Advisor, the generations known as the millennials, born from 1980 to 1996, and Generation Z, 1997 to 2012, are clearly comfortable with using their phones and apps to find financial advice.

Seventy-nine percent of Americans representing those two age groups have gotten financial advice from social media, according to the study, with 76% believing the content on social media “has made it less taboo to talk about money.” That opens the door to potential abuse on social media.

Three apps in particular — TikTok, Instagram and Twitter — are ranked among the top five social media sources where young people receive financial information, according to the report.

Financial advisors, an aging profession, are faced with two generations of younger potential clients who rely on mobile apps for financial advice. The rise of mobile application financial advice is a new danger for advisors to keep an eye on and to talk about with their current clients, the parents of younger investors turning to TikTok for hyper seminars on financial planning, investing and household budgeting.

How closely watched are the hundreds or thousands of influencers who casually dispense financial advice daily on these platforms?

“This is a real risk and threat to the industry,” said Clayton Chandler, chief security, privacy and data officer at Advisor Group, a giant network of broker-dealers. “For the so-called next-gen investor, wealth management means health plus wealth, and that style has a big social media presence. And the challenge is that we are seeing a massive increase in spoofed social media sites.”

A spoofed website refers to a fraudster potentially setting up a site with URLs or names that resemble those of registered firms.

FALSE CLAIMS

An investor alert issued in the summer of 2021 by the FBI’s Criminal Investigative Division and the Security and Exchange Commission’s Office of Investor Education and Advocacy says fraudsters may falsely claim to be registered with the SEC, the Financial Industry Regulatory Authority Inc. or a state securities regulator.

This has taken root with apps and social media, Chandler said.

“Bad actors lift the profile of a financial professional, with the intention of signing you up for a scheme and getting personal information,” he said. “It’s matriculated over to the world of social media, like spoofed Instagram sites that target the next-gen age demographic.”

According to the Financial Industry Regulatory Authority Inc.’s recent report on exam priorities, mobile apps can benefit investors in several ways, but they also raise “novel questions and potential concerns.”

Do certain apps encourage retail investors to engage in trading activities and strategies that may not be consistent with their investment goals or risk tolerance, the Finra report asks, and how do the apps’ interface designs and functionality influence investor behavior?

According to one industry observer, the answer to those questions is clear: The online and mobile app climate for clients and financial advisors is particularly pernicious in the wake of the pandemic.

“There are a whole bunch of investors out there thinking, I can get rich quick, who’ve been brought up on crypto, meme stocks and high volatility trading,” said Scott Silver, a plaintiff’s attorney. “The websites are glossy, sophisticated and give the appearance of being a legitimate trading firm, but you can’t figure out where money is located. These sites and apps are guaranteeing outrageously high returns on a monthly basis, so it’s very likely a fraud.”

4 RULES FOR CLIENTS TO AVOID SOCIAL MEDIA RIP-OFFS

• At all costs, avoid social media pitches to buy cryptocurrencies.
• Never listen to a financial advisor on social media who does not work with a legitimate custodian.
• Make sure any hard assets discussed on social media, like gold, are held in custody by a legitimate institution.
• Check with a CPA or CFP before allocating any money to investments.