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What Constitutes Investment Advice?

Investment advice comes in many forms–from your cousin pounding the table at Thanksgiving, insisting you buy Bitcoin, to talking heads on cable television telling you to be wary of a government report due to be released this week that could change market headwinds.


In some circumstances, the government regulates what can be said and by whom. In other cases, there is no oversight whatsoever. Investment advice is fraught with danger, although the Motley Fool Stock Advisor track record seems to have managed avoiding most of the 2022 market pain.


Impersonal Investment Advice


The Motley Fool Stock Advisor is a perfect example of what is known as impersonal investment advice. This is because the Motley Fool is not an investment advisor, even though it claims to understand the most accurate stock predictors. It also has no knowledge of your personal financial situation, your risk appetite, or your financial goals.


This lack of knowledge about the individual is the hallmark of impersonal investment advice. Whether or not you follow impersonal investment advice is completely up to you. In fact, you’ll often see disclaimers, both on TV and in articles, that tell you to “invest at your own risk” so that the audience knows there are risks involved with investing and that losing money is always a possibility. 


Conversations with friends and strangers online are also categorized as impersonal investment advice.


Your Best Interests


While the SEC (Securities and Exchange Commission) can do little to police the wild west of the stock rumor mill, they regulate certain individuals and companies. 


People such as Registered Investment Advisors (RIAs) and Certified Financial Planners (CFPs) have a duty to act in their client’s best interests. This is what is known in financial parlance as “fiduciaries.” Other people that can be considered fiduciaries are attorneys and estate planners who should not act against their client’s interests–but what is in the best interest of a client?


A fiduciary is obligated to always act in their client’s best interests. Morality aside, this is because the fiduciary has knowledge of their client’s financial situation, goals, and risk appetite.


Crossing the Line


Whether the advice is impersonal or coming from a fiduciary, there are instances where the government restricts what can be said without disclosure. Additionally, there are some restrictions on who can give advice. Here are a few potential scenarios:


Conflict of Interest


Let’s say a CFP advises their clients to invest in a real estate portfolio that the CFP is a major stakeholder in. This would constitute a conflict of interest, as the CFP stands to benefit and is not looking out for their client’s best interests. 


Insider Trading


This is probably the most severe violation of the law when it comes to securities. Insider trading occurs when a person who has inside knowledge of a company makes an investment they know will pay off because they have knowledge that the general public does not. 


Insider trading is also illegal if the knowledge comes from a third party. Simply acting on insider trading is considered a crime–this means both impersonal advice and fiduciary advice are prohibited from engaging in insider trading. 


Lack of Disclosure


Lack of disclosure typically falls under the headline of a conflict of interest, but we’re listing it separately to provide another example. If you own shares in a company and advise people to invest in it, whether it’s in-person or on television, it is a serious ethical violation. 


Similarly, if you hold a “short position” and advise others to sell their shares of that stock without disclosing your position, that is also an ethical violation.


In Summary


Whenever you talk about money or listen to financial advice from others, it’s important to know what regulations apply. Knowing these details can help protect you and your investments!