Why you should be wary of financial influencers
| February 12, 2024
There's no doubt about the impact and, well, influence, that influencers have had on Gen Z in recent years through social media platforms such as TikTok, YouTube and Instagram. These so-called experts create content and offer up advice on everything from fashion to food to beauty to health.
As Gen Z gets older, their interests are expanding into different sectors, including real estate, career advice and finance, creating the opportunity for a new kind of influencer. Financial influencers, or "finfluencers."
What are Financial Influencers?
Simply put, finfluencers are financial influencers that gives advice on a variety of financial topics, such as stock market trading, personal finance and mutual funds.
According to a study by TIAA, a third of all new investors use social media to research investment ideas. 32% of those investors also say they trust social media influencers and celebrities' financial advice.
So instead of turning to more conventional sources like brokerage, investment counseling firms and registered financial advisors, Gen Zers are turning to social media and influencers have taken note.
But their advice may not always be the most sage, and social media users should be aware of the dangers of seeking advice from unregistered financial advisers. These finfluencers frequently lack the knowledge or credentials necessary to advise others on what is best for them.
While some may have valuable insights and experience, it's important to remember that their advice may not be tailored to their follower's specific financial situation. Their eye-catching, short-form videos with punchy captions may seem easily digestible and informative, but it's always a good idea to do personal research and consult with a licensed financial professional before making any major financial decisions.
Why should you be wary?
Social media breeds comparison, and a user who sees their friends' latest Instagram posts from a European vacation might start feeling lousy about their current financial decision. Nearly half of Gen Z social media users say they've felt negatively about their finances after seeing posts from others, according to a 2022 survey from Bankrate.
Finfluencers are using this as an opportunity to gain an audience by touting their advice. What some users may not realize, however, is that often these influencers' videos are sponsored and monetized, aka – they are being paid to say a certain thing. Additionally, their videos often lead to more substantive paid content or other offered services, causing their followers to spend additional money, which is the opposite of what they are supposed to promote.
So who can you trust?
While brand and influencer endorsements are nothing new, the concept is still relatively new in the financial sector, a sector that is very regulated with stringent rules about performance claims and disclosure of potential conflicts of interest. That is why anyone seeking financial advice may want to opt for a licensed investment advisor instead of their TikTok feed.
Some differences between finfluencers and registered investment counselors include the fact that licensed investment advisors must follow laws that require advertisements and product endorsements to be truthful and disclose conflicts of interest. They must work directly with individual clients to formulate individualized investment strategies, and they must follow consumer protection laws that protect individuals from fraud and scams.
Meanwhile, financial influencers are not always required to disclose conflicts of interest. Their main objective is to gain a following and produce content and entertainment, therefore their advice is going to have a broad appeal, which is not ideal when it comes to financial advice. Finally, they are not covered under consumer protection laws.
Other tips to protect yourself
Finfluencers are good at their job, they know how to engage with their audience and invoke emotion and action. This doesn't mean they are a trusted source for investment advice. Investing should be an individualized endeavor where success looks different for everyone. Endorsements for financial products should be treated with skepticism and subjected to the same scrutiny and consideration given to any other major business decision. Therefore, try to avoid financial influencers who …
- Use scare or urgency tactics, and "FOMO" or peer pressure jargon
- Try to sell you something, i.e. a virtual class or workbook
- Promote "hacks" and "get-rich-quick schemes"
and instead …
- Look into their credentials
- Do your own independent research, request data that backs up their claims
- If you are going to invest, use a a registered financial advisor and only invest money that you can afford to lose
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