Apart from the traditional sources of information investors use to gather information about their own investment decisions, such as analyst estimates, news stories, and other indicators of market volatility, investors lately have been utilizing social sentiment tools.
These tools, offered by financial services firms seeking to provide market insight through compiling social media data from Facebook, Twitter, or other popular platforms, include:
- Social media data analysis
- Social networking trends
- Direct trading from social media websites or mobile applications
- Crowdsourced research and analysis
Social Sentiment Investing Tools: SEC Warnings
In a recent investor bulletin, the Securities and Exchange Commission (SEC) urged caution with regard to the use of social sentiment tools. Seeking to raise awareness among investors who are using or considering using these tools to gain further insight into possible investments without considering the potential risks involved, the SEC specified the following areas of concern:
- Information from social sentiment investing tools may be unreliable or misleading
- Social media posts used for analysis may have a hidden agenda, possibly released with the intention of influencing stock prices
- Social sentiment could sway an investor to make emotionally-driven or impulsive investment decisions
In short, investors should adopt an attitude of healthy skepticism and be aware of these potential risks when considering any investment advice gleaned from social media.
Using Social Sentiment Tools: Proper Perspective Required
For anyone planning to incorporate social sentiment tools into their investment decision-making process, the SEC advises the following:
- Thoroughly read all the disclosures, disclaimers, and background information accompanying a social sentiment investing tool, including information regarding how the tool collects and analyzes social media data, as well as any existing conflicts of interests
- Clearly grasp the short-term, volatile nature of social sentiment analysis, and avoid basing long-term investment decisions on such information
- Carefully and consistently track the performance of any investment decisions based on social sentiment investment tools against major market or sector indices
- Create and strictly follow a long-term financial plan to help protect against short-term emotional decisions about investments that could endanger any long-term plans
Social sentiment investing tools should never be the sole source of information relied upon when making investment decisions, and other market indicators should be used to check the reliability of any information coming from social media analysis before a final determination on whether to invest or not is made.
A Word of Warning for Investment Professionals
The SEC has specific rules governing the use of social media for the purpose of conducting investment business.
When using data aggregated from social media for investment decisions, it is important to be sure that the proper levels of disclosure required to meet compliance regulations are provided.
It must be made clear in the disclosure documents and marketing materials that the data used in any social sentiment analysis is being obtained through a third party, the third party must be clearly identified, and, it should be clearly stated that, while the data is believed to be reliable, its accuracy cannot be guaranteed and some risk to the investor exists. Information provided to public should be never misleading or fraudulent.
In addition, all documentation with regard to the data should be retained in case of an inquiry by the regulatory bodies.
Social Sentiment Tools and Disclosure—Help Is Available
The rules, regulations, and precedents regarding the use of social media in an investment context are still taking shape, and the construction of proper disclosure that meets regulatory standards can present a number of difficulties.
The consultants at Core Compliance & Legal Services, Inc., have extensive experience in the investment advisory industry and are prepared to guide your firm through the complexities of proper disclosure at all levels, including the regulations that govern social sentiment tools and social media marketing.