The recent rise of the ‘finfluencer‘ – short for ‘financial influencers’ (ie, people who give advice on investing and other financial products on social media) has resulted in increased interest in investing amongst younger generations. Some influencers with their own investing platforms have gained notoriety for their connections to the ‘manosphere’, while other less nefarious influencers have still been hit with warning notices by the market regulator, the Australian Securities and Investments Commission (ASIC), for giving unauthorised and potentially misleading financial advice.

So what do you need to know to protect yourself if you want to start investing, and whose advice can you safely rely on?

Investing 101

The term ‘investing’ is generally used to refer to buying shares in a company. This makes you a part owner of the company and gives you certain rights and benefits, like the potential to receive a distribution of a portion of a company’s earnings (this is called a ‘dividend’). There are two main ways to invest safely:

1. Through an online trading account on a reputable platform (eg, one linked to a bank), where you make your own investment decisions; or
2. Using a full service broker who does the buying and selling for you.

Both online trading platforms and full service brokers must have an Australian Financial Services License (AFSL) – it is a criminal offence for them to offer these services without having such a licence. Full service brokers must also have a reasonable basis for their advice and disclose any interest they have in the recommendations they make.

Online trading is generally cheaper than engaging a full service broker – online broking service fees are often very low, making it an attractive entry point for first time investors.

Exchange traded funds (ETFs) are also popular among new investors, providing a way to diversify their investment. An ETF is essentially a managed fund that buys shares in a particular category of companies and packages them together, for example the top 200 companies on the Australian Securities Exchange (ASX). You can trade units in the fund in the same way as you can shares, but you do not own the underlying shares – you own a unit or units in the fund, and in turn the fund owns the shares.

How to act lawfully and avoid some of the common pitfalls

It is important that you understand how the investment you are making works. If you choose to invest, make sure you trade on a reputable platform, and if you want to rely on advice given online, check to make sure that person has an AFSL or is authorised to give advice by someone who has an AFSL (you can search to see if they hold an AFSL using the Professional Registers Search tool) – some online trading platforms engage influencers to promote their products, but the AFSL holder remains responsible for what the influencer says. In fact, ASIC has commenced a review of several AFSL holders and cancelled the licence of another for failing to properly supervise the ‘finfluencers’ they engage.

If an influencer is being paid to promote a particular product or platform, check other sources of independent information before investing. More generally, use your logic and common sense – if something sounds too good to be true, it usually is. There is no such thing as risk-free investing or guaranteed ways to ‘get rich quick’. Some people think that ‘investing’ means the money you put in can only appreciate, but in reality many people experience significant losses due to trading – there are winners and losers.

It is also important to be aware of insider trading, which is illegal. Insider trading involves using information that is not public knowledge about a company to make investment decisions. When a person has inside information it is illegal for them to take, recommend or suggest a particular course of action in relation to an investment. Anyone who acts on inside information could be liable to up to 15 years in prison and a large fine.

Conclusion

Investing is on the rise among young people as it becomes increasingly accessible and seemingly easy, especially with online platforms. But if you choose to invest, it is important to be aware of the risks and make reasonable decisions with due care – don’t just rely on representations made by finfluencers with a vested interest in promoting a particular product.

Note that the content of this blog does not apply in all jurisdictions, does not constitute legal advice, and should not be relied upon. You should seek legal advice in relation to any particular matters you may have. All opinions expressed are our own, not necessarily those of any organisations with which we are connected.