FINRA Issues Report on "Investors of Color"
Commentary by Steven Lofchie
The FINRA Investor Education Foundation issued a report on "Investors of Color on the United States" that showed increasing participation in the financial markets by "Black/African American and Hispanic/Latino" investors. The report found that such investors were entering the market at a "faster pace" than white investors and younger than white investors.
The report provides a variety of statistics about investors broken down into four racial groups (White, Black, Hispanic, and Asian) including the age they started investing, the value of their investments, the reasons for their investing and the sources of their information. Notably, Black and Hispanic investors were very likely to rely on personal relationships and social media for investment information.
Commentary
What I found most interesting about the report is the extent to which younger and lower-asset investors were relying on social media for investment information, rather than on broker-dealers or investment advisers This is certainly not entirely surprising. Large numbers of younger investors do not have wealth that would make them attractive clients for investment advisers charging based on assets under management.
The fact that such investors do not obtain information from broker-dealers is also consistent with my doubts as to Regulation Best Interest and as to State regulations that go even further in imposing litigation risk on broker-dealers. See my article Choose One- Best Interest or Full Service. In particular, it is at least an arguable proposition that as the SEC increases the "fiduciary" burden on broker-dealers providing any investment recommendations, the SEC makes it too risky for broker-dealers to take the risk of making recommendations to investors with limited wealth. As a result, investors of limited wealth turn to modes of advice that are wholly unregulated; e.g., social media. Consistent with receiving advice from social media, these investors more frequently invest in "risky investments like cryptocurrencies and so-called meme stocks."
In short, if the SEC thought that the end result of Regulation Best Interest would be that low asset investors would not make risky investments because they would not be pushed into such investments by broker-dealer salespeople, this report is at odds with those expectations. Rather, those outside the regulated system make riskier investments.
In any case, my thought is that rather than focus on increasing the regulatory burdens to which broker-dealers are subject (which makes the provision of any investment advice to low asset investors unattractive), the SEC should consider whether there might be a way to build a regulatory model that works for financial service firms to provide information to low asset investors.