Should Social Media Financial Influencers Be Regulated?

(Note: A shorter version of this piece was published on the CFA Enterprising Investor Blog with the title “The Power of Clicks, Likes, and Shares: Promote the Right Kind of Financial Content”)

Financial influencers, aka finfluencers, have amassed an enormous following on social media, particularly among Gen Zs aged 18 to 25. Some finfluencers leverage social media to promote sound financial education, thereby providing significant benefit for society at large. But some others are bad actors, doling out questionable advice for monetary gain or social media fame.  

The rise of the finfluencers has been an unstoppable trend, with potential consequences in terms of market functioning and consumer financial wellness that have yet to be measured. But it already seems to have the US regulator worried. In its Financial Stability Report from November 2021, the US Federal Reserve Board argues that social media advice may not only increase risks for individual investors but also increase risks across the entire financial system.

There are several reasons why the Fed’s fears may not be totally unjustified.

To begin with, social media has no barriers such as paywalls - unlike high-end financial publications and financial research - which means the user base is less likely to be properly educated to investment risk. Ironically, financial influencers are disproportionately focused on riskier products, such as cryptocurrency, forex, turbos and CFDs (contracts for difference). It is also challenging for users to immediately establish if an influencer has real knowledge, and close to impossible to verify their track record - if they even have one.

Many social media users are also prone to herd behavior, and tend to copy other users, who are unlikely to be educated investors. This is potentially conducive to bad investment decisions, which can even go as far as producing

Data points to a large, unregulated market for financial advice

Having made the case that financial advice given by social media influencers can be dangerous, it is worth digging deeper into two studies that show some evidence of that.

A recent academic study analyzed more than 29,000 tweets on the X platform and found that some financial content creators have “negative skill.” These “antiskilled” finfluencers have more followers and more influence than skilled financial content creators, they point out.

The authors from the University of California, Berkeley, Louisiana State University, and Swiss Finance Institute-HEC Lausanne, maintain that there could be economic benefits to taking investment positions against the recommendations of “antiskilled” finfluencers. The implication is that the poor quality of their advice can be so consistent that betting against it may be profitable.

The authors found that 28% of finfluencers are skilled, generating 2.6% monthly abnormal returns; 16% are simply unskilled; and 56% are “antiskilled,” generating -2.3% monthly abnormal returns.

They conclude that social media users often follow finfluencers not based on their financial acumen as demonstrated through their posts but due to behavioral biases. Namely, the tendency to follow advice that aligns with their own pre-existing beliefs or behavioral traits. They caution that bad actors can harm investors and distort market functioning.

One of the issues with this study is that it only takes into account Twitter, which is highly limiting as Twitter preserves anonymity and it mixes up professional investors and content creators, which generates enough noise to cloud the results. The other issue is that this study does not segment by age, which can be problematic given the disproportionate amount of younger people taking their financial advice from social media.

A more recent CFA Institute-sponsored study has some useful recommendations for the regulator and for social media platforms alike, but fails to address the elephant in the room - the credibility of the advice shared by “finfluencers.” The recommended remedy to relying solely on finfluencers - requiring that users “cross-check” information by using alternative source only works in theory, as humans tend to suffer from “satisficing,” a decision-making strategy where people choose an acceptable option instead of the best one.

The same study argues - correctly, in our view - that the more financially illiterate consumers are, the more likely they are to take unrewarded risk in financial markets. Hence, give then general accessibility of social media, the increased risk from unregulated financial advice on these platforms. Case in point, data from the United Kingdom’s Financial Conduct Authority (FCA) shows that 69% of unlawful promotions identified involved websites or social media platforms.

Influencers, Knowledge Sharers, Though Leaders

Social media platforms reward the loudest finfluencers who make the most extraordinary claims, because they drive traffic and elicit large volumes of likes and shares.

But not all financial content creators on social media are created equal. A broad differentiation can be made between influencers, knowledge sharers, and aspiring thought leaders.

An influencer’s goal is to gain followers to generate revenues from endorsements. An influencer constantly pushes to become “more viral” – for his or her content to be liked, shared, and engaged with.

A knowledge-sharer, on the other hand, is someone who divulges tangible knowledge with the goal of educating others. Knowledge sharers may seek to monetize their efforts via subscriptions to online classes, book sales, and newsletter subscriptions.

Financial professionals like Mohamed El-Erian harness LinkedIn to showcase their thought leadership. Young professionals do the same, creating quality educational content with the hopes of elevating their careers. Some — like Ignacio Ramirez Moreno — collaborate with CFA Institute Research and Policy Center to highlight the importance of promoting the right kind of financial content on social media.

While the capacity to engage users is a goal for everyone using social media, charlatans tend to gain higher exposure. This is intuitive: social media algorithms give enormous advantage to people who make loud announcements and extraordinary promises because their posts get clicks, likes, and shares.  

This trend reaches its pinnacle in the crypto space, where scores of influencers with no knowledge, expertise, or credentials are not only recommending, but sometimes even launching crypto “projects.” Some of these are nothing more than “new tech” Ponzi schemes, enabling backers to use their “influencer” credibility to “pump and dump” newly minted coins. They gain followers by touting schemes to “play” the stock market and achieve unbelievable returns.

On top of that, many influencers have a hard time admitting they were wrong about a specific investment for fear of losing followers.

Popular knowledge-sharers, on the other hand, gain followers by being entertaining and helpful, teaching skills like building power point presentations.

The danger is that non-relevant, often misleading information will crowd out genuine financial education and knowledge.

Creating a Space for Knowledge Sharers

Financial education is an area in which social media could provide enormous benefit for society at large, but this can only truly happen if knowledge sharers with genuine interest in educating users are valued and promoted.

But many younger investors are bombarded with information that they are incapable of correctly digesting and discerning. Their unjustified self-confidence and tendency to rely on “alternative” sources of information does not bode well for their financial welfare. As the CFA study found, investors under 35 were the least likely to perceive cryptocurrency as risky, and young investors and male respondents were also more likely to believe they would outperform the stock market.

This is not only foolish for them, but dangerous for the financial system at large. Excessive risk taking damages long-term wealth accumulation, but can also distort markets if it reaches scale. Reddit’s “WallStreetBets” GameStop saga is a case in point.

The desire for more regulation is offset by the need to appeal to young investors who tend to shy away from investing in financial markets. For the time being, there seems to be a vested interest by industry players to keep the flow of social media noise going without any concern about consumer welfare.

Knowledge-sharing professionals are, however, an entirely different story. They are a positive force for good and - if they are sufficiently “entertaining” - they can provide financial advice at much lower price points and on platforms where younger investors actually do spend their time. Many institutional investors have indeed learned the lesson, and are trying their own social media strategies. The regulatory environment should definitely be welcoming of these forms of “on-the-run” advice.

For users, the most important pillar in discerning insightful educators from noisy charlatans is the ability to evaluate information. While engagement and likeability are key for social media success, insightful educators tend to be more transparent and grounded with their views.

Social media can serve as a powerful tool for financial literacy and democratize access to investment knowledge, rather than promulgate exploitation and misinformation.

Perhaps launching new platforms built solely for educational purposes is the answer?