Whether we like it or not, we are constantly bombarded by investment advice. Many people think that investment advice only comes from licensed financial advisors, but this couldn’t be further from the truth. In fact, the vast majority of investment advice a person receives is what is known as “impersonal investment advice.”
While investment advisors, wealth managers, and certified financial planners are all bound by regulations and licensing requirements of the federal government, impersonal advice rarely entertains such scrutiny. Because of this, investors need to be aware of what constitutes impersonal advice and make sure they fully understand the risks involved in following that advice. Tools like the Motley Fool Stock Advisor recommendations and similar publications fall under the umbrella of impersonal investment advice.
What’s the Difference Between Personal and Impersonal Advice?
What constitutes investment advice can be a bit complicated. First, let’s understand the “personal advice” side of things before we dive into the impersonal. The key to understanding personalized financial advice is one word: fiduciary. A fiduciary is a person or company that provides financial services to their client. More importantly, they have a duty to act in their client’s best interests.
This doesn’t necessarily have to be a licensed financial advisor. For example, a person who has been designated as the executor of an estate is a fiduciary, in that they must act in the best interests of the beneficiaries of the estate.
On the licensed side of things, a certified financial planner (CFP) is a fiduciary because they must act in their client’s best interests when planning their client’s future.
Another example of a fiduciary is the board of a corporation that has shareholders. The board has a fiduciary duty to its shareholders to shepherd and safeguard the shareholder’s investment in the company. Many high-net-worth investment strategies rely on a corporation’s board being fiscally responsible.
Impersonal advice is any investment advice that is spoken to a wide audience or, if it is presented to a singular audience, is given without knowledge of the individual’s investment preferences, risk tolerances, or personal financial situation.
Media personalities on television shows, weekly financial columnists, and stock tip sharing newsletters are all examples of impersonal investment advice. What shields impersonal investment advice from potential liability is plausible deniability. It is simply unreasonable to expect that everyone doling out financial advice, whether online or on television, could possibly understand the investment needs of every individual.
When Is Impersonal Advice Illegal?
Being able to hide behind plausible deniability only goes so far. There have been cases where those providing allegedly impersonal investment advice have found themselves on the wrong side of the law in the eyes of regulators like the Securities and Exchange Commission (SEC). Here are a few examples of when impersonal advice falls into legal hot water:
Conflicts of Interest
This situation arises when a person advises people to buy a stock while not disclosing that they own shares in the company or would otherwise stand to gain if the share price rose suddenly. Similarly, advising people to dump a stock while shorting that company is a conflict of interest if you do not disclose your position against the company.
As long as the position is declared while advising others to invest, the person giving the advice is typically in the clear. Prosecuting a conflict of interest case is serious, as advisors found guilty have faced significant consequences.
Insider Trading
Having inside knowledge of a company’s performance and using that knowledge to encourage others to trade that stock is illegal. This is true whether the person who has inside knowledge benefits or not. The simple act of disseminating non-public information or using it to gain an edge for others is highly illegal and a quick way to find yourself the target of a federal investigation into securities fraud.
Pump and Dump
Typically, this is a situation that uses both insider knowledge and a conflict of interest to encourage others to buy a company’s stock. This inflates a company’s share price so that insiders and those “in the know” can cash out, leaving the unsuspecting investors holding the bag as the stock price craters.
In Conclusion
Most people will take whatever financial advice they can get, but they need to be careful where it comes from. Knowing the difference between personal and impersonal financial advice can help you understand who to trust and keep your investments safe.
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