In the fast-paced world of investing, it’s essential to have reliable sources of financial guidance. But what happens when these sources aren’t as trustworthy as they seem? Enter the world of finfluencers – social media influencers who offer financial advice. Sure, they might drive round in a Ferrari and appear to live in a mansion in Miami, but just take a second before you dive into their enticing promises, let’s explore why it’s crucial to exercise caution and, in many cases, avoid finfluencers altogether.
What is Social Media Influenced Investing?
Social media influenced investing is a trend in which individuals turn to platforms like Twitter, Instagram, TikTok, YouTube, and Reddit for investment advice and recommendations. Instead of relying on traditional financial advisers or qualified, professional experts, many people now seek guidance from self-proclaimed financial influencers, or “finfluencers,” who have amassed large followings on these platforms.
These finfluencers often present themselves as knowledgeable and experienced in financial matters, showcasing their investment successes and providing tips on how to make money in the market. They may discuss investment picks, trading strategies, cryptocurrency investments, or other financial topics, and their content can be engaging, fast paced and persuasive.
How Do They Operate?
What red flags should you be looking out for? Well, finfluencers operate in various ways:
Content Creation 📷
Finfluencers create engaging, sometimes ‘clickbait’ style content, such as videos, articles, and social media posts, to share their financial knowledge and experiences. They use storytelling and relatable anecdotes to connect with their audience.
Investment Picks and Analysis 📈
Many finfluencers offer investment recommendations and analysis, claiming to have identified hidden gems or undervalued assets. They often showcase their own successful trades to reinforce their credibility.
Financial Education 🎓
Some finfluencers focus on providing educational content to help their followers improve their financial literacy. This can include budgeting tips, savings strategies, and explanations of complex financial concepts.
Affiliate Marketing 🌐
Finfluencers may promote financial products, services, or trading groups or platforms through affiliate marketing agreements, earning commissions for referrals or sales. This can create conflicts of interest if they prioritise commissions over their followers’ financial interests.
Telegram/Whatsapp groups 📱
Some finfluencers run private messaging app groups whereby they, or people they work with, share trading and investment tips. This is more common for day-trading finfluencers. These groups typically have a monthly cost to be a part of. Again, it can be hard to verify the reliability of the financial advice given in these groups and they’re run with very little accountability.
What are the risks of finfluencers?
Lack of Expertise ✍🏻
One of the risks of social media influenced investing is the potential lack of expertise among finfluencers. Many of them do not have formal financial education or professional credentials, yet they dispense financial advice to their followers. Relying on unqualified individuals can lead to uninformed investment decisions and potential financial losses.
The Bias Trap 💵
Finfluencers may have undisclosed financial interests in the investments they recommend. Companies might pay them to promote specific investments or products, leading to biased and potentially detrimental advice that may not necessarily align with the best interests of their followers.
Non-specific & Impersonal Advice 🚩
Everyone’s financial situation and goals are different, and therefore there is no ‘one-size-fits-all’ solution to investing. Finfluencers will not be taking your personal situation into consideration when posting their advice and therefore there’s a good chance that it might not be appropriate for you, increasing risk.
Herd Mentality 🐑🐏
Social media platforms can foster herd mentality, where investors follow the crowd without conducting their due diligence. When a popular finfluencer endorses a particular investment, it can lead to a rush of investors flocking to buy the same asset, causing price distortions and heightened volatility.
Lack of Accountability 📄
Unlike licensed financial advisers, finfluencers are not held to regulatory standards or ethical codes of conduct. This absence of accountability means there is little recourse if their advice leads to financial losses. Unlike qualified financial professionals who have undertaken years of education and training to gain specialist knowledge and become experts in their field. They are subject to rigorous oversight by regulators focused on ensuring people receive appropriate, high-quality advice, while being responsible for all recommendations they make.
Market Manipulation 📊
In some cases, finfluencers with large followings can potentially manipulate markets by spreading misinformation or engaging in pump-and-dump schemes. This illegal activity can result in significant financial harm to unsuspecting investors. In recent years the cryptocurrency space has been rife with such pump and dump schemes.
Why you should tread carefully with Finfluencers
Conflicts of Interest ⚔
Finfluencers may have undisclosed financial interests in the investments or products they recommend. Followers may not be aware of these conflicts of interest, which can lead to biased advice. When you see an influencer promoting financial advice or investment tips, don’t immediately take it at face value; do your own due diligence or speak to a qualified financial professional.
Overconfidence 😤
Some finfluencers exude confidence and charisma, which can be compelling. However, overconfidence can lead to risky investment decisions based on unfounded beliefs or speculation.
False Information ⁉
In some of the worst cases, fraudulent finfluencers can falsify their lifestyle and financial information to gain your respect and trust. Things like renting fancy cars and hotels or faking investment returns are tactics used to convince you they live a wealthy and successful life, and that they can teach you how to achieve that too. When seeing things like this online, it’s always good to consider – ‘what’s the catch?’ because more often than not, there is one.
Lack of Risk Disclosure 💥
Finfluencers may not adequately emphasize the risks associated with investing. This can give followers a false sense of security and lead to investments in assets they do not fully understand.
Short-Term Focus 🤓
Many finfluencers emphasize short-term gains and speculative trading strategies, which may not align with the long-term. A typical theme amongst dodgy finfluencers is their notion of ‘get rich quick’. It’s worth thinking twice about any type of plan or scheme that promises to give you great wealth overnight.
Emotional Investing 💖
Following finfluencer advice can lead to impulsive investment decisions driven by emotion rather than a rational, well-researched strategy. Emotional decisions can result in significant losses during market downturns.
Approach Investing Responsibly
Investing can be a great way to responsibly grow your wealth in a way that is comfortable for your life, your goals, and your risk tolerance. Consider the following strategies when you begin your investment journey for responsible investing:
Diversification 🥧🥧🥧
Spreading your investments across a variety of assets and sectors can be a tactic to manage risk.
Education 📖
Take the time to educate yourself about investment options and strategies. Knowledge is your best defence against financial pitfalls. Do your research and find reliable and trustworthy information sources. Our Knowledge Centre is a great place to start building your financial education.
Trusted Advisers 🤝🏻
Seek advice from licensed financial professionals who adhere to regulatory standards and have a track record of helping clients achieve their financial goals. If you’d like to meet with one of our expert advisers to see how we could empower you financially, click here to book a free, no-obligation appointment with one of our Private Wealth consultants.
Long-Term Perspective 😎
Remember that successful investing often requires patience and a long-term outlook. Avoid chasing short-term gains and speculating on volatile assets. It’s often said that ‘time in the market’ beats ‘timing the market’. This means that planning for the future and making consistent, well-informed investments is a great way to grow and maintain your wealth.
Risk Management 👌🏻
Everyone has a difference tolerance for risk. Whether that’s due to your income level, life goals or investing mindset. Assess your risk tolerance and create a diversified portfolio that aligns with your financial goals and comfort level.
While social media may tempt you with promises of quick riches, the path to financial success is most effectively navigated with the guidance of those who are qualified and licensed to provide sound financial advice. Professionals have the expertise, experience, and regulatory accountability to guide you toward sound investment choices that align with your unique financial goals and risk tolerance.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.
