The meteoric rise in the power of “finfluencers” raises concerns

A jump in self-directed investing it has been driven in part by a surge in the influence of financial influencers, research Showsbut how can investors know if they’re getting bad advice from social media?

This question is already starting to irritate regulators. In August last year, the United States Securities and Exchange Commission issued a investor alert on social media and investment fraud, while the UK’s Financial Conduct Authority has issued a warning last month to the same “influencers” on the risks of promoting illegal get-rich-quick schemes.

“I don’t think there is a way [to tell good finfluencers from bad ones]. People say bad things about good people and good things about bad people,” Kevin Paffrath, a finfluencer known as Meet Kevin, told his 1.87 million YouTube subscribers, and who launched his own exchange traded fund.

Paffrath himself is a case in point. Shortly after the Meet Kevin Pricing Power ETF (PP) launched in December last year, Paffrath was unexpectedly embroiled in the scandal surrounding the collapse of the cryptocurrency trading platform FTX.

Paffrath said he earned $289,000 from FTX endorsements. “We wish we’d never worked with them in hindsight—so much bad press and we had no idea, nor could we have,” she said.

He was named defendant in a class action lawsuit brought by investors against a group of YouTube influencers promoting FTX.

However, Paffrath is unusual among lenders in that he has acquired a number of finance qualifications, including one to act as a licensee financial advisor.

Unlike him, the quality most financial influencers share is that they have no formal financial education.

This might sound strange, but it could be an unfortunate by-product of strict marketing and approval rules that apply to wealth managers and other finance professionals around the world.

Regulators themselves have tried to close the education gap—the SEC’s National Financial Capability Month in April was the latest example—but such campaigns face an uphill battle to get investors’ attention.

A report from Performance Marketing World published in August last year estimated that financial influencers experienced an average annual growth rate of 8% in their number of followers in 2021, double the 4% growth for all other influencers.

Newer investing apps rely heavily on finfluencers to spread the word about their services. Adam Lees, head of marketing at InvestEngine, a UK investment app that offers only ETFs, said the company has worked with around 80 partners, including YouTubers, bloggers and personal finance websites.

Lees said around 40% of marketing was spent on influencers, such as Jubair Ahmed, a postdoctoral researcher in biomedical engineering at University College London. He earns a commission when viewers of his InvestEngine content click on a link that leads to the investing app.

BlackRock caught the attention of many in the wealth management industry by engaging a finfluencer in an innovative endorsement marketing campaign. The video set features five promising U.S. basketball rookies in the NBA Draft, a selection process that draws large audiences across U.S. society.

The basketball players are “tutored” by social media influencer Lauren Simmons, formerly one of Wall St’s youngest traders, who introduces them to investment principles that could guide how they invest the sponsorship money they receive as part of the campaign.

“iShares Future Baller$ was deliberately conceived at the intersection of investing and basketball to introduce young and new investors to the iShares brand,” said Monique Le, iShares direct investment and marketing manager for the Americas.

“Our research has shown that sport is a key point of passion for our target audience and the campaign has enabled us to meet them where they are.”

The campaign videos have been viewed 192 million times, according to BlackRock.

BrokerChooser, a consultancy firm, measured new account openings at 17 brokers used by investors in the US, Europe, UK and globally, selected for their size, longevity and data transparency.

Brokers had around 43 million retail accounts in 2020, but that number had jumped 120% to around 94 million by the end of 2021. Growth has slowed since the end of the pandemic. There were approximately 121 million retail accounts at the end of the first quarter of this year.

Even more striking was the jump in trades executed with these brokers, which rose more than 300% from 887 million in 2019 to 3.6 billion in 2020 and peaked at 5 billion in 2021 before declining during the adverse market conditions last year.

If qualitative research from the UK’s FCA is all to go by, that the huge growth in retail accounts could indicate an urgent need for better education.

The new group of self-directed investors they studied were more than twice as likely to use YouTube and social media for their information as those who had been investing longer.

But how can investors trust what they’re looking at?

Ahmed is very aware of potential conflicts of interest and warns of the risks self-directed investors face in consuming social media content.

“If I became a full-time creator, I think it would be a conflict of interest,” he said, adding that he thought it would be difficult to stay loyal to his audience under the circumstances.

He said one piece of advice he could provide on how to avoid unethical content creators on social media would be to steer clear of anyone trying to convey a sense of urgency.

A general rule of thumb might also be to seek transparency about how creators make their money, he said.

But as Paffrath points out, there’s little regulation on social media. “As soon as I mention my ETF: ‘Hey, check out my ETF, it’s the Pricing Power ETF. . .’ Boom! must go to the regulation. But until then I’m completely separate and nobody checks anything which I think is bad. I mean, I try to do my best.