Should young adult clients be wary of finfluencers?

Recommendations from TikTok, YouTube and other social platforms could lead millennial and Gen Z investors astray

Should young adult clients be wary of finfluencers?

While social media provides a new way for the wealth industry to reach and teach investors, members of the younger generation are also getting their cues from other sources – and that could be a problem.

“The scary part about how fast financial content spreads online is that I don't think there’s a true understanding of risk associated with certain kinds of investments,” says Michael O’Brien, a financial advisor at Sun Life in Newfoundland and Labrador.

Social media’s positive bias

As a member of Generation Z, O’Brien is plugged into the trends on social media channels like TikTok and YouTube. That includes a rise in content related to personal finance and investing, with many influencers touting benefits like quick returns or large gains.

“I find that social media tends to only show the positive outcomes of an investment or strategy,” he says. “It focuses on how well people are doing, but it doesn’t highlight their downfalls, and sometimes that can be dangerous.”

In a paper published last November, the CFA Institute highlighted a growing trend of social media influencers hawking financial products, with the capacity to reach millions of social media users and potentially spread misleading information to prospective investors.

“Social media influencers don’t always put the interests of their followers first,” says Sivananth Ramachandran, director of Capital Markets Policy at the CFA Institute. “You can frequently see them talking about risky investment strategies or products, rather than things that will make sense for the average investor.”

The collapse of FTX late last year has raised uncomfortable questions for financial influencers. After the U.S. crypto exchange giant went bankrupt, investigations revealed a pattern of fraud and gross mismanagement under the watch of founder and CEO Sam Bankman Fried.

Many victims blamed celebrity and social media personalities who touted FTX, saying they wouldn’t have put money in the doomed exchange had it not been for those endorsements. Others say that promoters should have done better due diligence and realized the underlying risks before agreeing to be ambassadors for FTX.

Gaming the system

“Not everyone realizes endorsements are paid for. Influencers don’t always disclose their compensation arrangements with the companies or products they promote,” Ramachandran says. “We even found instances where financial influencers not only get paid for making a recommendation, but also even participate in the funding rounds of companies they promote products for, which gives those influencers even more skin in the game.”

Some social media influencers game the system by padding their follower counts with bots, which Ramachandran says adds to the problem. Artificially inflating their profile increases their clout with real live followers, which lends their posts an extra layer of authority and believability.

“When someone sees a 15-second TikTok on whole life insurance and cash values, they may come away thinking they’re an expert,” O’Brien says. “That scares me, because they may be way better off contributing to a TFSA or an RRSP, or several accounts rather than putting $1,000 amounts in a policy that might not make sense.”

At his practice, O’Brien gets a lot of questions from clients about finance-related posts; from there, he’s able to talk to them and determine whether what they saw online could work for them. But as young Canadians gain unprecedented access to potential misinformation, there’s still cause for concern.

“I'm fearful that sometimes social media is followed to a tee, despite not being in the best interest of that individual,” he says. “There’s value in working with an advisor who can provide advice and planning that is tailored to your specific needs and goals.”