Social media has transformed our lives, so much so that it has gained a sort of legitimacy as a means of communication and information sharing. Many “internet celebrities” have ridden this wave, despite having little to no background or expertise in the areas related to their posts.
According to a TIAA survey, one-third of all new investors use social media to research investment ideas. That means a lot of people are taking financial advice from celebrities and influencers. What users might not realize is that these people may be receiving compensation for their “advice”. Kim Kardashian recently agreed to pay a $1+ million settlement with the U.S. Securities and Exchange Commission (SEC) for promoting a cryptocurrency without disclosing she had been compensated $250,000.
The term to describe a financial influencer on social media is “finfluencer.” With so many using social media to do their investment related “research” these days, it is important to understand how to evaluate who is qualified to give financial advice. It is valuable to have some criteria by which to judge the advice given and the person giving it.
Is the finfluencer or advisor financially motivated to recommend specific products?
A monetary incentive or affiliation can present a conflict of interest when making a recommendation, especially if it is not fully disclosed. The Federal Trade Commission (FTC) works to stop deceptive ads and publishes best practices for social media disclosures, but the regulation for finfluencers is admittedly less robust than it is for a registered investment adviser or a broker-dealer.
Does the finfluencer take a follower’s unique circumstances into account?
A finfluencer is typically posting broadly on social media and therefore does not have a personal relationship with each follower. For a truly personalized experience, we encourage individuals to work with an advisor who takes the complete picture (comprehensive financial planning) including the client’s needs, goals and objectives, and risk tolerance into consideration when making recommendations.
Who regulates the person or entity giving advice?
While finfluencers as a group are not regulated, there is some guidance. According to the FTC’s Disclosures 101 for Social Media Influencers, a finfluencer must disclose a “material connection” with the brand being promoted, either in the form of payment or discounted products and services.
In contrast, a financial advisory firm is required to be registered with the appropriate regulating body. The SEC regulates any investment advisor or broker-dealer with assets under management of greater than $100 million. For smaller investment advisory firms, they are regulated by their state. All registered SEC advisors and firms have public records and disclosures on this website: www.adviserinfo.sec.gov
Professional licenses?
Many advisors have professional designations, such as Certified Financial Planner (CFP®) or Chartered Financial Analyst (CFA), which require passing a rigorous exam along with a minimum number of years of relevant work experience in addition to ongoing education, ethics, and professional development.
As with all investment decisions, here are some criteria to consider:
• If the (very loud and questionable sounding) advice seems too good to be true, it probably is too good to be true. An example is: “Avoid making your next mortgage payment using this HACK!”
• If a finfluencer claims to hold a financial certification, check with the licensing organization to verify that they do in fact have that certification and are currently in good standing.
• For every investment recommendation by a finfluencer that shoots the lights out, there are likely others that did not. Keep in mind that their success is predicated on the number of views and clicks that they get rather than on the substance of their recommendations.
While there is plenty of meaningful discourse on social media about various investment instruments and strategies, there is also a lot of questionable information and outright opinion not backed by evidence. Just as you wouldn’t take investment advice from a stranger you just met at a cocktail party, you should be skeptical of investment advice given by an online finfluencer even if you feel like you know them. With minimal regulation online, the investor must beware.
Sources: *TIAA Digital Engagement Survey, June 2021, North American Securities Administrators Association (NASAA), Federal Trade Commission, Securities and Exchange Commission, California Department of Financial Protection and Innovation
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