Understanding Financial Influencers and the Need for Caution
by, Jeremy Reif, CRPS
This is the tale of the double-edged sword of financial advice. Financial influencers are gaining a lot of traction on social media. The landscape in the next few years will drastically change because of influencers and the development of artificial intelligence in this space. This will increase the need to navigate all financial advice with caution.
In the digital era, financial influencers have become a significant force in shaping investment behaviors and personal finance decisions. With their massive followings on social media platforms, anyone and everyone can take a phone and record a video. Some videos will ultimately go viral. Unfortunately, there is nothing governing or regulating the advice that is being handed out. This is why that space has very restrictive credentials and exams to give advice. Who should you believe, the guy who has ten million views and two million followers or an actual professional with substantially fewer views and probably even fewer followers?
The reality is, who wants to watch a boring video and get advice that sounds like work or takes years to accomplish? People naturally gravitate toward fun stories and catchy images. These videos usually have a hook in their message, some even with outlandish promises. Getting rich quickly is what everyone dreams about. The best part of these videos is that it usually sounds like it is very little work or effort and the smallest financial contribution to make their dream come true.
These influencer personalities often present themselves as gurus in wealth management, promising lucrative returns and financial freedom. However, as a financial professional, it’s crucial to approach their advice with a healthy dose of skepticism. Here’s why financial influencers are not always the beacons of financial wisdom they claim to be.
Hidden Agendas and Sponsorships
One of the most concerning aspects of financial influencers is the potential for hidden agendas. Many influencers receive compensation from companies to promote specific products or services, which can lead to biased recommendations that don’t necessarily align with the best interests of their audience. True financial professionals have to have certifications, and pass exams, and some even hold themselves out as fiduciaries. Registered advisors also need to disclose conflicts of interest and, in many cases, have to disclose how they are compensated. Influencers often do not disclose these relationships fully or the extent of their compensation, making it difficult for followers to distinguish between genuine advice and sponsored content.
Lack of Proper Financial Knowledge
While there are undoubtedly knowledgeable financial influencers who offer valuable insights, the barrier to entry for becoming a financial influencer is remarkably low. A significant online following does not equate to financial expertise. It is sad to see that often people pick videos for advice based on views and followers. Many influencers lack formal education or professional experience in finance, leading to advice that is overly simplistic, misleading, or outright incorrect. Relying on such guidance without proper vetting can lead to detrimental financial decisions.
Non-Compliance with Regulatory Standards
Financial professionals are bound by strict regulatory standards set forth by entities such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). These regulations ensure that advisors act in the best interest of their clients, maintain confidentiality, and provide advice based on thorough analysis. These regulations also say that an advisor can present themselves to the public as a specialist in something unless they have credentials to prove it. Financial influencers, on the other hand, operate outside of these regulations. They are not required to adhere to these standards, leaving their audience vulnerable to unscrupulous practices.
The Illusion of Personalization
Financial influencers often present their advice as a one-size-fits-all solution. They might even tell a great or inspiring story. However, personal finance is inherently personal. What works for one individual may not work for another due to differences in income, risk tolerance, financial goals, and life circumstances. Without understanding these nuances, following broad advice from influencers can lead to strategies that are not aligned with one’s financial situation.
The Way Forward
- Navigating the world of financial advice in the age of influencers requires discernment and due diligence. Here are a few recommendations for individuals seeking guidance:
- Seek Multiple Perspectives: Do not rely solely on the advice of a single influencer. Seek out multiple sources of information to get a well-rounded view of your financial decisions.
- Verify Credentials: Look for financial advice from individuals with verifiable credentials and a track record of professional experience in finance.
- Beware of Promises of Quick Wealth: There is no such thing as getting rich quickly. If there was, everyone would be doing it. Be skeptical of advice that promises quick and guaranteed returns. Legitimate investing involves risk, and there are no guaranteed shortcuts to wealth.
- Consult a Professional: When in doubt, consult with a registered financial advisor who can provide personalized advice tailored to your specific financial situation. Specifically, seek out someone who is a fiduciary and has to put your financial well-being first.
While financial influencers can provide entertainment, valuable insights, and inspiration, it’s essential to approach their advice with caution. By understanding the potential pitfalls and conducting due diligence, individuals can make informed financial decisions that truly align with their personal goals and circumstances. Remember, in the realm of personal finance, knowledge, and skepticism are your best allies.