Investments Recommended by Finfluencers - Can You Rely on Them?

May 16, 2023 / Reading Time: Approx.  9 mins

Listen to Investments Recommended by Finfluencers - Can You Rely on Them?

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It is a well-known truth that many investors begin investing after hearing about successful investments made by relatives, close companions, or colleagues. Now, there has been an addition to the list of people influencing an investor's investment decision - social media influencers. The growing demand of social media for various information has not only led to some profitable but also some precarious situations, especially about investing which involves your hard-earned money.

The term 'Finfluencers' (finance influencers) is popular among investors since these individuals provide advice on personal finance investments such as stocks, mutual funds, and so on via social media platforms through the content they create (YouTube videos, tweets, Instagram posts/reels, etc.). Unfortunately, if you blindly follow their advice, many of them have the potential to harm your investment portfolio. Finfluencers talk about how much money they have invested and the profits they have received from the market. They provide stock recommendations, thoughts on new fund offerings, investments in various avenues, and portfolio management tips. Several novice investors are drawn to such recommendations and attempt to replicate the investing techniques promoted by these Finfluencers.

Individuals, particularly Millennials and Gen Z, are increasingly turning to Instagram and YouTube for finance-related material, and professionals in these sectors are embracing social media to grow their followers and advance their careers. It comprises chartered accountants, investment bankers, and stock market brokers who use social media to give investment advice and strategies. However, in some cases, this has resulted in circumstances where investors have lost money following incorrect guidance from non-certified Finfluencers. With minimal or no checks on these Finfluencers, the situation might deteriorate.

For instance, in October 2022, Kim Kardashian, a popular internet sensation and celebrity, was charged with a $1.26 million penalty by the US Securities and Exchange Commission (SEC) for advertising Crypto Security EMAX on her Instagram account without revealing that she was paid $2.50 lacs to do so. This case serves as a warning that just because celebrities or influencers support investment possibilities doesn't guarantee that products are suitable for all investors or are even legal.

You see, famous Finfluencers, have a large subscriber base or target audience; imagine the reach and influence these channels may have over investors. As their fame grows, several financial institutions contact them to promote the products/services in order to broaden the brand's reach. I just came across a video on social media of a popular Finfluencer describing the best mutual funds to invest in and how these mutual funds will double your investment amount. It talked about how one can achieve financial goals through these plans!

This incident prompted me to warn my readers on why they should be cautious of investment advice from Finfluencers.

Given that financial literacy is the cornerstone of a healthy financial life, we have always addressed it in our financial and investment planning articles. Knowing the fundamentals of personal finance allows you to make sensible decisions and, more importantly, avoid making bad ones. Although money management as a life skill has not been an intrinsic component of our schooling system, social media has filled in the gaps. In this regard, social media has been a huge help in spreading financial knowledge and guiding individuals through a maze of information on a wide variety of personal finance subjects such as investment planning, stock trading, mutual funds, market perspective, and insurance, among others.

However, market information via social media is a double-edged sword and most investors fail to understand how to use or apply that knowledge to enhance their own personal financial situations. And this is where the actual issue arises. It is advisable for investors to effectively filter appropriate data and avoid blindly following investment recommendations that are not backed by a strigent research and a SEBI-registered advisor.

Here are three main factors to consider as an investor when it comes to Finfluencers:

1. One-size does not fit all investors

The self-proclaimed market experts or Finfluencers give generic financial advice that may or may not be appropriate to everyone. You should avoid taking such broad recommendations because everyone's financial condition, approach to money, risk tolerance, investment horizon and goals, potential income earning ability, number of dependents, lifestyle, saving and spending habits are different.

For example, early retirement or retiring in your 40s is a popular topic among millennials, commonly known as (FIRE - Financial Independence, Retire Early). It contains retirement corpus calculations, which are oversimplified by taking an X amount, which is the costs in golden years, and inflating the same amount until the age of 40, and then arriving at a monthly number to begin investing for the milestone. Life, on the other hand, is more than a spreadsheet or a calculator.

There are various factors and life events that Millennials need to consider, like starting a family and handling the rising financial responsibilities. Furthermore, the harsh bouncers that life might throw at you in the form of job loss, health difficulties, unpredictability in macroeconomic conditions, etc., may add uncertainty to your retirement preparation. As a result, you should not blindly follow any Finfluencers providing broad financial advice; instead, your investments should be based on your suitability.

Investments Recommended by Finfluencers - Can You Rely on Them?
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2. Beware of Fake Finfluencers

Today anyone with access to the internet may become a Finfluencer and begin advising about money management. If you look around more carefully, you may easily avoid clickbait information and unreliable advice from social media influencers. Finfluencers may collaborate with a specific brand to endorse their product and services (paid promotion). This makes it essential for investors to conduct due diligence on the brand and analyse if the finfluencers advice aligns to your risk tolerance, investment horizon and goals. Do not assume that since the Finfluencer is investing in specific stocks or mutual funds, they will provide strong returns.

Additionally, You may also identify red flags that indicate a fake Finfluencer, like if they use words or phrases such as 'double your money,' 'guaranteed return,' and so on. Consider this to be deceptive, as every investment entails some risk, and no mutual fund guarantees return or immediately doubles your money; all are exposed to market risks. It is easy to believe influencers with a large social media following are market gurus, but this is not the case.

[Read: The SMART Way to Calculate the Return You Need And Invest Wisely for Your Goals]

3. Credentials of the Finfluencer matters

To provide investment advice, Registered Investment Advisers (RIAs) that are licenced by the Securities and Exchange Board of India (SEBI) must have a minimum academic qualification and experience. As a result, you should always double-check the credentials of Finfluencers. This means that a financial influencer should be a finance sector professional or authority who is eligible and certified to give investment advice and carries good knowledge about capital markets. Not necessarily an Ivy League degree in finance, but some basic education and experience in the industry.

However, there is no entry barrier on social media, and anybody can give free investment advice without following any certification criteria or regulatory constraints. The majority of these Finfluencers are not formally registered or SEBI-registered advisors, which has led to the discovery of several illicit practices. As a result, the regulatory authority, SEBI, stated in December 2022 that it intends to establish a framework to regulate these Finfluencers.

SEBI explores ways to regulate the Finfluencers

Unregistered social media influencers are not qualified to provide investment recommendations. The significant increase in non-certified Finfluencers providing unsolicited financial advice has alarmed the market regulator with concerns that such unregulated and self-appointed advisors are putting investors' money at jeopardy.

Having said that, there are certain regulations established against Finfluencers on a global level, such as in Australia, Finfluencers may face up to 5 years in prison if they give financial advice without a prior licence. In India, SEBI has previously taken down a few individuals who were fraudulently inflating stock values using Telegram and WhatsApp channels. Although SEBI has said unequivocally that it intends to create a framework for overseeing unregistered advisors, it is a long road ahead. The distinction between financial advice and financial education might be difficult to establish. Furthermore, micro-managing each social media handle or account in terms of content would be a daunting task.

To conclude...

While consuming information for the sake of financial literacy is beneficial, making personal finance decisions based on free information available on social media can be detrimental. The cost of such free advice, particularly product-related advice such as stock recommendations, mutual funds, and insurance, is usually high.

Lastly, bear in mind that only SEBI-registered advisors can provide investment recommendations. So, beware of non-certified finfluencers giving advice and recommendations on various investment avenues.

 

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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