Like a casino, the flashing lights and sounds emanating from millions of screens are luring individual investors to pull the proverbial lever on the slot machine – irrespective of fundamentals and what their advisors might say about the merits of such an approach.fatido/iStockPhoto / Getty Images
If the investment industry had any doubts about social media’s ability to make an impact, they were put to rest earlier this year when a band of retail investors took to self-directed trading platforms to give rise to certain equities that became known, colloquially, as “meme stocks.”
What started with GameStop Corp. GME-N has turned into a whole new subgenre of securities that are valued less by traditional fundamentals and metrics and more by social media momentum and retail interest.
As the debate rages over the merits, efficacy, impact and even legality of the social media-inspired trading activity, social media’s impact on investing is inarguably here to stay.
Advisors’ evolving role
Having a view on broader market direction, specific sector allocation, and portfolio composition is as old as the investment advice industry itself. It’s what financial advisors do: cut through the noise and calibrate their clients’ investing goals with an eye on their long-term financial goals and objectives.
That noise used to be driven by headlines and dinner party conversations that might lead to a phone call or e-mail about a particular stock. Today, it’s constant and omnipresent.
Like a casino, the flashing lights and sounds emanating from millions of screens are luring individual investors to pull the proverbial lever on the slot machine – irrespective of fundamentals and what their advisors might say about the merits of such an approach.
For advisors, trying to dissuade clients from entering the casino is moot. Social media’s power over elements of the market and investor behaviour is here to stay, and it will likely continue to grow.
Thus, it’s important for advisors to double down on what they’ve always done best: regulate their clients’ emotional impulses and ensure that fear of missing out doesn’t derail longer-term priorities.
Every major market movement is seen as different from the past. From the Dutch Tulip bulb bubble in the 17th century to the bursting of the dot-com bubble in 2000 to the global financial crisis in 2008 that almost took down the economy, there is – and always will be – those who feel that “this time is different.”
That’s why dismissing such a pronounced investor trend won’t work. Instead, advisors must continually measure, assess, and calibrate the advice they provide to the current set of circumstances so they can provide counsel that reflects their clients’ investment goals, time horizon, and general risk tolerance.
In this kind of environment, “don’t ignore the core” is more applicable than ever. While speculative stocks may, in fact, have a place in client portfolios, they certainly shouldn’t play a significant role within them.
The democratization of investing
Social media’s sustained democratization of investing is a positive force. It inspires and draws in a new generation of investors and savers who want to participate in financial markets by investing in sectors, companies, and funds that meet their goals and align with their values.
It also highlights the importance of an advisor’s duty to their client – one not shared by the “finfluencers.” The foundational objective for advisors is to manage their clients’ investment strategy and provide appropriate counsel to deliver upon their long-term financial goals. Of course, finfluencers don’t share those responsibilities.
It’s crucial for advisors in this environment to be able and willing to listen to clients when they come with questions about meme stocks, cryptocurrency, or any other retail-led investment trends. It’s equally important to offer a measured, informed response on how best to proceed given their interests and existing financial goals.
The next generation of clients thinks and acts idiosyncratically. How advisors respond will have a significant impact on their ability to engage, guide, and help the future’s younger, digital-native clients.
As that transition continues to take shape, the most important thing advisors can do is adapt to new ways of thinking about personal wealth, respecting their clients’ interests, and responding with care and insight. Doing so isn’t just good practice, it’s an existential necessity.
Anne Hoare is head of asset management solutions at SEI Investment Canada Co.