Are meme stocks really a thing again?

The inexplicably popular trades that were the darlings of 2021 made headlines this week as self-proclaimed “degenerate” investors piled into unassuming stocks, like Krispy Kreme. The embattled doughnut and coffeehouse chain hit a record of over 100,000 contracts traded Tuesday, and if that sounds like a lot for a company with deliciously cheap treats, it is: it’s equivalent to 71 times its average daily volume over the past four years. Elsewhere, the price of Kohl’s miraculously doubled, and Opendoor kicked off the week with triple-digit-gains. It’s the latest episode in the meme-stock saga that has perplexed financial advisors and has retail investors living by the motto: “donut kill my vibe.”

“These are appealing to investors for the two oldest reasons in the book,” said Zoltan Pongracz, a CFP and cofounder of Third View Private Wealth. “Although the meme craze is new, fear (of missing out) and greed still are the underlying drivers.”

Donut Stop Believing

Meme stocks are largely driven by social media forums, most notably Reddit’s Wall Street Bets. While they generally get a bad rap because they’re based on social media influence, not the underlying fundamentals, modern markets are increasingly driven by narratives, said Adam Patti, CEO of the asset manager VistaShares. “These momentum-driven stocks are appealing because in many cases it is a form of gambling,” he said. “The ironic thing is that sophisticated investors straight up to institutional traders often do the same.”

Clients are generally attracted to the potential for sudden, dramatic gains, which can trigger rushes of dopamine, the brain’s “feel good” hormone, said Brandon Galici, CFP and founder of Galici Financial. “Few clients have asked me directly about meme stocks, but when they do, I begin by asking about what they are ultimately trying to accomplish,” he said. If a client insists, Galici shifts the conversation to risk management, asking: “If this stock goes to zero, how would you feel?” The question usually helps reframe the discussion around their long-term goals.

Crypto Kreme. For most advisors, it’s a good time to have an educational conversation about what these rallies are and what they aren’t. They can either stay the course and avoid the volatility, or treat it like, “entertainment capital: money you can afford to lose,” Pongracz said. “Otherwise, you’re the exit liquidity.”

If clients are adamant, make sure they have the staying power to survive volatile market cycles. Pongracz likened it to some high-flying crypto traders who were completely “out of the game” when the crypto winter hit and were left on the sidelines during Bitcoin’s impressive rally this year. “It’s the most hated rally ever,” he said. “Sometimes it’s about the risks you don’t take.”

Advisors with kingpin clients can breathe easy for now.

Regulatory efforts to crack down on malfeasance occasionally harbored by the industry are likely to be delayed for at least two years. The Treasury Department’s Financial Crimes Enforcement Network announced this week that it plans to postpone a new set of anti-money laundering requirements for financial advisors that would’ve targeted terrorist financing and foreign corruption. Though the move is not yet official, the start date for the rules is expected to move from early next year to Jan. 1, 2028, while the agency takes time to “revisit the scope” of the rule.

The delay has been welcomed by many advisors, who worried about greater oversight, burdensome regulation and increased compliance costs.

If You See Something, Say Something

Adopted last summer, the AML rule is meant to curb the use of US advisory firms for foreign corruption, tax evasion, and fraud. Treasury officials said advisors have served as gateways into the financial system for sanctioned parties including Russian oligarchs and have helped China and Russia access sensitive technology and services. The rule would’ve required RIAs and exempt reporting advisors to:

• Design risk-based AML and counter-terrorism financing programs.
• File Suspicious Activity Reports (SARs).
• Maintain records of fund transfers (though advisors rarely move client money directly).

“Advisors generally do not present significant AML risk,” Gail Bernstein, general counsel at the Investment Adviser Association, told Barron’s. “We would like to see any rule scoped better to reflect this low risk.”

Cheers and Jeers. Investor advocates, however, see a dangerous opening. “Trump talks a tough game on drug cartels and terrorism, but he has rolled back almost every rule that’s meant to hit crime where it hurts by following the money,” Corey Frayer, director of investor protection at the Consumer Federation of America, told WealthManagement.com.

It’s not retiring, just transitioning.

While a major component of financial planning is preparing clients’ estate plans for after they’re gone, oddly enough, advisors often neglect to make similar plans for their firms. Succession planning can be an intensive and emotional process, but the longer founders put it off, the more clients might be looking for a new home for their assets. “We see a lot of clients that are coming to us wanting to leave other firms because they don’t see transition plans,” CD Wealth Management founder Scott Cohen said at a press event held by Kestra and Bluespring Wealth Partners in New York City last week.

Next in Line

In many instances, founders and next-gen advisors are misaligned on succession plans, and in some cases, founders intend to die at their desks. However, the earlier firms get an idea of who will lead after the founder or CEO is gone, the better. “It’s something that people need to take more seriously and take some of the medicine that they’re giving their clients about documenting a plan for succession,” said John Amore, president of Kestra Financial, which recently published a study that found:

• Only 6% of advisors currently have a fully realized succession plan.
• The top priorities for firm owners when it comes to succession planning are ensuring clients continue to receive the same level of care and maximizing practice valuation.

First Hand Experience. After the timeline kept getting pushed for when Cohen would take over his former firm, he decided to start his own practice and not make the same mistake. He identified a successor, offered her equity in the firm, and created a pathway to leadership, which began by training her in multiple roles and responsibilities at the firm. This year, Cohen stepped into an advisor role while the successor took over as CEO. She’s already identifying potential successors. “We’re already thinking about it so that we’re never stale, we’re never making a last-minute decision and it’s the wrong one,” CD Wealth CEO Ilona Friedman said.

Whether it’s an ego issue, or not fully trusting a next-gen advisor, some founders just don’t want to give up their firms. However, Cohen said they should always put clients before themselves. “What’s more important about the future of their firm?” he said. “Is it [the founder] or is it the firm?”