You’ve probably heard this expression: “Information is power.”
But what if that information is wrong?
Social media has become the main source of investing advice for millions of young adults. That is very troubling.
Sure, some of the information that financial influencers share on YouTube, TikTok or Instagram is appropriate, such as encouraging people to keep savings in a high-yield, insured bank or credit union account, but many tips could harm your long-term wealth.
“Finfluencers” run the gamut, and they may not adhere to the same standards or code of conduct as regulated financial professionals.
The Finra Investor Education Foundation recently released data on U.S. retail investors’ attitudes, behaviors and knowledge. It found that young adults are increasingly turning to social media for investment advice. A quarter of people surveyed said they use recommendations from social media finfluencers in making investment decisions; among those 35 and younger, it’s 61 percent.
Here’s a scary statistic: Fifty-seven percent of those with less than two years of investing experience look to social media for such financial advice.
I am encouraged that so many young adults are trying to learn about investing. However, extreme caution is necessary when making financial decisions solely based on recommendations in an online video.
Here are the key reasons seeking investment advice from social media influencers is inherently risky.
They aren’t qualified
Many finfluencers lack experience to provide recommendations.
It’s not until you have spent hours poring over someone’s budget that you understand how financial advice works in practice.
Unlike financial professionals, who are regulated, you may be following the advice of finfluencers who operate with little to no oversight.
Like many journalists, I have a presence on social media. But my work links back to credible sources. I also have years of experience teaching financial literacy through this column, with nonprofits and through my church.
If you come across a video or recommendation that interests you, fact-check it against a reliable independent or government source, such as the Federal Trade Commission, Securities and Exchange Commission or Finra.
You will find a lot of good advice at investor.gov, where you can search for a firm or an individual investment adviser’s registration status and background, including any disciplinary actions. The site links to Finra’s BrokerCheck database.
The Federal Deposit Insurance Corporation has a section on its website (Money Smart for Young Adults) dedicated to providing basic financial information for young adults ages 16 to 24.
For personalized advice, consider working with a professional financial adviser, especially one who operates under a fiduciary standard, meaning they are legally required to act in your best financial interest.
The Financial Planning Association is the membership organization for certified financial planner (CFP) professionals. Search for a CFP online at plannersearch.org. The National Association of Personal Financial Advisors (napfa.org) can put you in touch with a fee-only planner. You could also check the National Association of Insurance and Financial Advisors (naifa.org).
Planners with certain designations must meet specific educational and employment requirements and agree to abide by a code of ethics. Other credentials to look for: chartered financial consultant (ChFC) or certified public accountant (CPA) with a specialty designation as a personal financial specialist (PFS).
It’s a paid ad
Finfluencers can earn money through sponsorships, affiliate links and commissions for promoting specific financial products, services, stocks or cryptocurrencies.
They frequently fail to disclose these payments, so their “advice” is often a paid advertisement intended to benefit them, not necessarily you.
Advice is simplistic
Finfluencers squeeze complex topics into short videos, often oversimplifying investment strategies. They either gloss over or entirely ignore the significant risks involved.
I have watched dozens of videos promoting the benefits of homeownership in building generational wealth. Rarely does the finfluencer balance this advice with the pitfalls of buying a home before you are financially ready to handle such a big responsibility.
Last year, I examined the quality of advice from TikTok content creators. Can you tell the difference between good advice and foolish financial recommendations?
Here’s a link (wapo.st/financial-advice-quiz) to find out.
Too much hype
Social media thrives on short, engaging content.
The influencer’s primary goal is often to produce viral content to boost views and expand their follower count. This encourages them to use sensational claims and manipulate your emotions.
For instance, they make people feel like fools if they aren’t investing in cryptocurrency. But the volatility of cryptocurrency makes it unsuitable for many investors. It has also become a favorite for fraudsters because it’s so hyped online and attracts investors, especially young adults, who fear they will miss out on the next great investing opportunity.
Fear-driven decisions are not the way to make sound financial choices.
It might be a scam
In the worst-case scenarios, some finfluencers are involved in “pump-and-dump” schemes.
They aggressively promote a stock, for example, to inflate its price. Their goal is to drive up the share price before quickly selling their own holdings in the security.
Treat any advice you encounter online as suspect until it is proved trustworthy. Your best defense against bad investment strategies, scams and poor advice is being informed and skeptical.
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