Social media ‘financial gurus’ are changing the financial landscape, for the worse

Over the past few years, social media influencers have gained immense importance as more and more users continue to join social media platforms. These influencers create content in the form of photos, short and long videos, usually focusing on a specific topic.

For example, some influencers focus on wellness, while others focus on fitness, art, politics, education, etc. Others remain loyal to trends, changing their focus area with the latest trends. Influencers, like all celebrities, use their connection with their audience to sell products of different brands. Brand advertisements are integrated into the content produced by these influencers.

Over the past few years, high returns on financial assets have attracted a large number of investors to the financial markets. Google Trends shows a 20x increase in searches for the word “crypto” between September 2020 and November 2021. The keyword “stocks” has a much smaller increase of 2.5x over the same time period.

The increase in the population’s interest in the markets gave an impetus to companies whose investment products were primarily aimed at retail investors. These companies, which often deal in crypto-products, mutual funds or stocks, have hired influencers to advertise their investment products. But ultimately, influencer marketing appears to have resulted in multiple instances of mis-selling, a major problem in the financial services industry.

What is the Vauld Crisis?

Recently, a number of prominent social media influencers made public statements after Vauld, a crypto-lending platform, halted withdrawals from the platform. The company ran an influencer campaign with these influencers a few months ago.

Its product was marketed as a “fixed deposit” that was safe and offered investors significantly higher returns than a normal fixed deposit. Yields went up to 12 percent, which is quite high for a “term deposit,” given that the risk-free interest rate is significantly lower. It is highly likely that such returns would probably require increased risk unless the markets were grossly inefficient.

The videos of these prominent influencers constantly refer to the “crypto fixed deposit” product sold by the lending platform. Now, these videos have several new comments from retail investors who invested in the product, talking about the significant sums of money they lost.

However, this is not the first time social media has been used to mislead investors. A few months ago, some Twitter influencers came under fire after tweeting about Salasar Techno Engineering Limited (STEL). These influencers were allegedly contacted by agencies that paid them to tweet about STEL in order to raise the company’s stock price.

In other cases, Telegram groups have been used to drive up prices of illiquid stocks where group owners take positions in stocks before making recommendations for these groups. The modus operandi used by stock market manipulators has changed with the advent of social media.

Until a few years ago, investors often received calls and messages from Indore-based companies offering hot tips on illiquid stocks. Today, social media offers an opportunity for these manipulators to reach investors for free and on a larger scale.

Questionable Finfluencer advice

In addition to these direct violations, financial influencers have been known to share, among other things, superficially researched stock ideas, questionable financial advice, and unsafe investment ideas.

Part of the blame for substandard content lies with the audience these influencers serve. The audience is interested in oversimplified and short financial advice, rather than understanding the complexities of the investments they are about to make.

Therefore, short-form content that offers oversimplified advice often gets high engagement, compared to hour-long videos that discuss the nuances of personal finance/investing. Since engagement and subscribers are two important metrics that influencers closely monitor, they create content that is preferred by their target audience.

As a result, we’re left with terabytes of similar short content that only boosts brands but has little or no real value to our financial journey.

Trading vs Trading Courses

Some of these fin-tech influencers claim to be traders with portfolios worth tens of crowns. So it’s quite surprising that they spend their time and effort on brand advertising, for relatively small amounts. Others even run courses that teach trading strategies to beginners.

Anyone with a basic understanding of the stock market would understand that developing a sustainable competitive strategy in the markets is quite difficult. Once a trading strategy is known to a large number of market participants, everyone would jump into that trade, making it rare and unprofitable.

Therefore, professional money managers prefer to work discreetly, to prevent anyone from stealing their ideas or strategies, unlike social media traders. If someone gives away their competitive advantage developed over many years, in exchange for a few thousand rupees, the motive should be questioned.

“Financial gurus” have been around for a long time, but technology has democratized the ability to become a guru. Previously, these “experts” had only a few prominent television channels, newspapers and magazines through which they could reach the masses.

But today social media has removed all the barriers between the experts and the masses. This is why it is of the utmost importance that investors learn the difference between charlatans and real experts. Influencers have helped millions demystify finances, but followers must also be aware of the potential negative impact.

In general, influencers have some skin in the game, with significant upside and an asymmetrically low downside, should things go south. Recent debacles are a lesson for retail investors to stop depending on five-minute videos and superficial explanations, before investing a significant portion of their hard-earned money in products promoted by influencers.

Read also: Explained: China’s nearly $1 trillion debt problem a ‘bullet’

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