Financial disinformation

The pandemic showed the power of a previously unknown virus to spread through the global population, threating health and creating economic mayhem. But few people appreciate the power of bad information to go viral in a similar way, endangering their wealth.

Globally, regulators are warning of an increase in financial disinformation and outright scams, fuelled by the growth of social media use, the failure of a traditional media gatekeepers, rising isolation during the pandemic and the human propensity to fall for get-rich-quick pitches.

The result of all this is people are losing billions of dollars annually by acting on unreliable information, often spread by bad actors through digital media channels.

So just as we learned during the pandemic about maintaining good hygiene and consulting health professionals, the explosion of financial disinformation highlights the importance of sticking to sound investment principles and having a trusted financial advisor onside.

The growth of scams

Just about every week, a financial regulator somewhere is alerting people to this issue. Unfortunately, the perpetrators are becoming increasingly sophisticated.

In New Zealand, the Financial Markets Authority says about 20% of the population has been targeted by investment scams. Among the latest, a New Zealand man lost his life savings after agreeing to sell his house and using the proceeds to invest in a fake AAA-rated term deposit supposedly paying 13.5% per annum.

The Australian Competition and Consumer Commission (ACCC) says losses to bond investment scams nearly tripled in the first half of 2022. Consumers lost more than $20 million to imposters impersonating banks and claiming to offer legitimate government bonds or term deposits.

Overall, scams robbed Australians of a record $3.1 billion in 2022, the ACCC says, with investment information scams the highest loss category.

Confirming that this is a global phenomenon, the US Securities and Exchange Commission (SEC) recently charged 11 individuals in a fraudulent cryptocurrency pyramid and Ponzi scheme that raised more than $300 million from thousands of retail investors worldwide.

Regulators in the UK have also noted a significant rise in scammers taking advantage of the growing use of digital communication tools. Specifically, the UK Financial Conduct Authority found perpetrators are using screen-sharing software to take control of victims’ computers, steal their passwords and drain their bank accounts.

These rogue operators have become so sophisticated that in some cases, when investors seek to retrieve their money, the scammers impersonate recovery agents who offer the victims help in getting their money back, in exchange for a fee of course.

The rise of social media

Outright fraud is not the only information threat to investors. The demise of the gatekeeping role of traditional media and the rise of unverified and unedited social media content can encourage people into unwise short-term trading, often based on unreliable rumours and opinions.

The meme stock boom of 2021 took off during the pandemic, as people stuck at home started trading popular shares using cheap or free trading apps and sharing information on social media channels.

Social media has also created a new type of financial celebrity known popularly as the ‘finfluencer’. These are people, often without qualifications, who offer advice on anything from buying a house, to setting up a budget to building a global share portfolio.

Regulators have started to issue warnings (or guidance) to social media influencers, reminding them that, like any licensed financial adviser, they are still subject to the laws related to discussing financial products and services.

Social media in itself is not entirely a malign phenomenon. In many ways, it democratises access to information. But it also carries risks for users who unwittingly assume that all the information they find there can be trusted and reliably acted upon.

Again, this highlights the value that a trusted financial adviser brings, in both acting as an information filter and understanding the needs and goals of each individual client.

Tips to improve your information hygiene

All of this means that exercising information hygiene habits to protect our wealth is as important as the lessons we adopted during the pandemic to protect our health. These healthy information habits include the following:

• If an investment opportunity sounds too good to be true, you should exercise scepticism. Offers of ‘high return-low risk’ should set off alarm bells.
• Be wary of any unsolicited offer or unexpected contact, particularly if it comes via a social media platform.
• Tighten up your privacy controls on social media and protect yourself from identity theft. Do not share your screen with someone you have never met.
• Use trusted, established sources for financial information as much as possible.
• Limit your media consumption. Just because you can check news headlines and your portfolio 24 hours a day doesn’t mean that you should.
• Most importantly, work with a licensed financial adviser who understands your needs, circumstances, goals, and risk appetite.

This article has been adapted from an article titled Information Hygiene, written by Jim Parker of Dimensional Fund Advisors.