What the industry can learn from 'finfluencers'

February 20, 2024 3:50 PM

Personal finance influencers on social media — known as "finfluencers" — are guiding young investors often ignored by the wealth management industry with some helpful advice, according to a new report by the CFA Institute.

They could also be violating advertising and securities laws.

That's one of several interesting takeaways, highlighted in the slideshow below, from a January report by the institute's Research & Policy Center. The report considers the contradictory impact, marketing implications to financial advisors, regulatory questions for the industry and behavioral investing trends at play amid the rise of finfluencers in recent years. The finfluencers posting on TikTok, Instagram, YouTube or other social media often draw more traffic than certified investment professionals' channels. And they won't be fading out of view anytime soon.

"Finfluencers will continue to disrupt the financial advice industry," one of the report's authors, CFA Institute Senior Head of Research Rhodri Preece, said in an email. "One of the primary barriers that Gen Z investors cited to utilizing a personal financial advisor was cost. Advisors can differentiate themselves by thinking about the long-term prospects of their client base, and while those Gen Z investors may not be viable clients today, it is unclear whether they will be in the future. By offering tailored information that comes with quality assurance, high levels of competency and duty of care, financial advisors can remain competitive in an increasingly digital world."

The researchers conducted focus groups with younger European investors and analyzed a sample of 110 videos and posts across TikTok, Instagram and YouTube. Their findings and recommendations to the industry, social media channels and regulators carry more resonance in light of enforcement cases such as the Securities and Exchange Commission's settlement last week with a fund company that partnered with Barstool Sports founder Dave Portnoy on an ETF launch or another one in 2022 involving Kim Kardashian's work touting a cryptocurrency asset.

"This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn't mean that those investment products are right for all investors," SEC Chair Gary Gensler said at the time. "Ms. Kardashian's case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities."

Advisors who face harsh regulatory penalties if they don't disclose their conflicts of interest often point out the dearth of disclosures on social media, which is often effective at beaming out false information to millions of people at a time. Just 20% of the finfluencer content with what the researchers deemed to be an investment recommendation displayed any disclosure, Preece noted. And 47% of the posts or videos that had any form of promotion included disclosures about compensation or other conflicts. In other words, the amateur investment personalities may be engaging in conduct that would place actual professionals in legal hot water.

"The current landscape of finfluencer content lacks structured guidelines around disclosure," Preece said. "More needs to be done across the industry to ensure there is a proper understanding of what constitutes financial recommendations and the disclosures that must be present in order to protect investors on social media."

Members of Generation Z, or roughly those born in 1997 or later, often find investment information from these finfluencers, according to Preece, who explained that those disclosure responsibilities fall to firms in the industry that work with them as well. Still, he and the other researchers found some positive signs in the finfluencer movement

"It was encouraging to see through the social media content that we evaluated that finfluencers did demonstrate an interest in educating their followers," he said. "The popularity of this content demonstrates a desire from young investors to understand and engage in the financial markets, which could represent an important opportunity for our industry as a whole."

To see 16 key takeaways from the CFA Institute's report on finfluencers, scroll down the slideshow. And follow these links for more analysis of investment advice on social media, connecting with new generations of clients and regulatory cases involving finfluencers:

Filling a gap?

"Our research suggests that finfluencers may be filling the gap in access to financial information by helping synthesize what is perceived to be complex financial information into accessible social media content. Overall, finfluencers appear to be challenging notions that financial education needs to be formal to be informative and that sound investment advice is issued exclusively by professionals," the report stated.

Speaking the language

"Our research shows that finfluencers are able to position themselves in ways that are more likely to appeal to Gen Z investors by being present on digital platforms, by providing information for free, by creating content that is perceived to be engaging and informative and that can be accessed during leisure time, by being more relatable to a younger audience and by being able to tap into the financial anxieties and desires of Gen Z investors."

Big popularity

"The most followed finfluencers [in the sample] were Erika Kullberg on Instagram, with 4.3 million followers, and Graham Stephen and Ali Abdaal on YouTube, with 4.2 million and 3.9 million subscribers, respectively, at the time this research was conducted. … The median number of followers/subscribers in finfluencer accounts for the sample was 128,000. … At least 10 pieces of content in the sample received over 1 million views."

What are finfluencers doing online?

"Our analysis of finfluencer content posted on YouTube, TikTok and Instagram in the markets we studied shows that the most discussed asset classes were individual shares, index funds and exchange-traded funds. We found that 45% of this content offered guidance, 36% contained investment promotions and 32% contained investment recommendations."

A wealth-building tool?

"Traditionally, increasing youth participation in capital markets has been challenging despite younger investors being at life stages where they can afford to take more risk. Hence, social media and finfluencers could play an important role in educating young people on means to achieve upward mobility and enhancing financial inclusion."

The role of emotion

"The most common theme we identified was anxiety around finances, which included not knowing where to start investing. Finfluencers often rhetorically asked questions related to whether investing was a source of confusion for their audiences and then presented their content as a solution to some of this confusion."

Missing disclosures

"Of the 35 pieces of content containing recommendations, only 7 pieces contained disclosures of any form (20%). Further, of the 40 pieces of content that contained investment promotions (6 of which were also recommendations), only 21 contained a disclosure. This finding is concerning because both securities and advertising laws are likely contravened when marketing disclosures are not made."

Some suitable guidance

"Examples of good practice included finfluencers who provided information (guidance) about when it was suitable for individuals to invest, such as once they had 'created an emergency savings fund' or 'paid off existing high-interest debt.' … Finfluencers also provided guidance around investment strategies, most notably by conveying that investing should be viewed as a long-term way to build wealth and, therefore, investors should start investing as soon as possible provided that certain conditions were met."

Lifestyle

"Investing was framed as a means to participate in the consumption of high-end consumer goods, such as sports cars, or as a way to maximize leisure time if one became a successful enough investor. … It was evident that finfluencers often attempted to position their content as not only solutions to financial worries but also gateways to certain lifestyles that may appeal to aspirational values."

A safe space?

"One finfluencer used the term 'wealth for women of color' and portrayed herself as 'providing a safe space for women of color' to learn about personal finance and investing. This finding illustrates the potential for finfluencers, when abiding by regulations, to be an important vehicle in enhancing capital market participation, in particular by minority groups who have historically had lower levels of participation."

Distrusting the professionals

"Focus group investors in Germany and France were particularly expressive about their lack of trust in professional advisors. Their skepticism related to a belief that professional advisors would make recommendations only on the basis that they would receive a commission."

What’s a recommendation

"Regulators should cooperate to design and implement a more universal definition of an investment recommendation. In addition to promoting products, we observed some finfluencers recommending that their audiences buy, sell or hold financial instruments."

Regulators should engage with finfluencers

"The majority of finfluencers appear genuine in their educational efforts but are likely unaware that some of their activities are regulated. Regulators should, therefore, engage directly in constructive dialogue with finfluencers and explain which of their activities are regulated."

Status updates

"Finfluencers should also be required to disclose their regulatory status — that is, whether they are a regulated advisor, a tied agent, a broker-dealer or none of the above — even when partnering with regulated firms."

Cheaper substitute

"Notably, among the focus groups, not a single Gen Z investor mentioned using or planning to use a professional advisor for reasons that related to their status as being regulated and trained professionals whose services come with at least some level of investor protection. Overall, it appears that finfluencer content is used by some Gen Z individuals as a cost-effective and accessible substitute for professional advice."

Implications to advisors

"The main differentiators of professional advisors are that the information they provide can be tailored and comes with assurances of quality, professional competency and duty of care. Advisors must emphasize these elements in their value proposition if they are to stay competitive in an increasingly digitalized world."