Regulators are warning consumers to be careful about taking
from online influencers or so-called “finfluencers.” The criticism is mostly justified but also ignores some of the benefits of following financial influencers and some of the problems with relying solely on the financial industry itself.
There may be a more balanced perspective on social media financial advice that can help consumers.
Warnings from the regulators
A recently released report from the International Organization of Securities Commissions (IOSCO) called Finfluencers recommended a worldwide strategy ranging from educational initiatives to enforcement actions aimed at cracking down on financial influencers.
In the United Kingdom, it is now a criminal offence to encourage someone to invest in a security unless the person recommending it is licensed by the Financial Conduct Authority (FCA) or a specific exemption applies.
A Swiss Finance Institute (SFI) research paper, also titled Finfluencers, concluded “(that) most finfluencers are unskilled or ‘antiskilled,’ producing negative … returns, while (only) a minority demonstrate skill.” The authors found that these less skilled financial influencers, whose investment recommendations led to lower returns, made posts that were more engaging and tended to attract more followers than the skilled finfluencers who may have been worth following.
Closer to home, the
Ontario Securities Commission (OSC)
conducted a survey of retail investors who have made financial decisions based on the advice of finfluencers. They found these investors were more than 12 times more likely to have been scammed on social media and nearly five times more likely to trade their investments several times a week. (Frequent trading tends to lead to lower returns.) Respondents were also more than twice as likely to have had significant investment losses in the past and tend to be self-directed investors who have no professional support for financial advice.
Self-directed investors or any investors who want an unbiased source to learn about investing basics should check out the resources on
. FAIR is Canada’s only national, non-profit, investor-focused organization, independent of any government or regulator.
Financial literacy increases overall wellness
My own controversial take on finfluencers is that they have done a good job raising awareness about investing and other wealth building strategies for the masses. They have managed to reach people who may not have otherwise taken an interest in personal finance. Teenagers are learning about money and investing, even if the advice may not be great. Personal finance is becoming proactive and mainstream rather than just a responsibility for rich retirees.
Studies show that financial literacy is good for both financial wellness and overall wellbeing. If TikTok and Instagram help reach an audience who would not care about their finances without financial influencers, is it all bad?
The financial industry requires skepticism
Most people in the financial industry are good people who care about their clients, but most businesses in any industry exist primarily to make a profit. There are concerning
in some areas of the Canadian financial industry that put profits ahead of people and that can lead to biased advice.
Many financial advisers in Canada do not provide financial advice as their primary responsibility. They sell products and they and their companies are paid a percentage of the fees collected, whether the fees are explicit or embedded. Many advisers have no legal fiduciary responsibility to put their client’s best interests first and most people are unaware of this.
As a result, a consumer needs to take financial advice with a healthy sense of skepticism. It does not need to be this way, but it is, and the financial industry has been very protective of this flawed model. I think there is a benefit from having finfluencers to force discussions between clients and financial advisers that might not otherwise happen without them.
One-size-fits-all does not exist
The most important thing to remember is that there is no single strategy that suits everyone. So, whether you are reading a blog post from a bank financial adviser or watching a Facebook Live from a self-proclaimed money guru, you should consider the topic or advice to be general in nature. It may not apply to you at all.
Some investors should not buy stocks. A
registered retirement savings plan
may be better than a
depending on the circumstances. Life insurance is an essential risk-management tool for a young breadwinner but may be a terrible way to pay tax on your estate.
Should you follow finfluencers?
There can be bad and biased advice on social media. Some of the finfluencer advice is blatantly bad and biased. Most of the financial industry advice is good but can also be biased.
The best thing that you can do for your finances as a consumer is to absorb as much as you can from several sources to make good money choices based on you and your own goals. This applies whether you work with a professional or not but take everything with a grain of salt.
Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.
