Finfluencers’ advice can be financially risky

Social media influencers focused on financial topics, known as “finfluencers,” have become a popular source of investment advice. While some finfluencers provide valuable information, translating complex financial concepts into digestible content, others may offer questionable or manipulative advice that can lead to significant financial losses for investors. To identify potentially biased information, it is important to verify whether the finfluencer receives commissions or payment for recommending certain products. Alarmingly, only about half of content containing such promotions actually discloses this information. Investors should also be aware of persuasion techniques used by finfluencers. These techniques include: 1. Content with a low construal level, which is concrete, detailed, and specific, can lead to overconfidence in the advice being given. 2. Content that plays on emotions, such as excitement and enthusiasm, can subconsciously affect viewers’ emotions and decisions. 3. Content that makes the viewer feel closer to the finfluencer, such as asking questions or sharing personal vulnerabilities, can foster trust but may detract from focusing on their expertise. In India, more than 82% of followers of finfluencers reported making investments based on their advice, with 70% claiming profits. However, the CFA Institute report cautions that these results might be influenced by positive market performance in recent years and potential bias from followers unwilling to admit being misled.

Investor caution advised with finfluencers

The study also found that over 63% of finfluencers fail to disclose sponsorships or financial affiliations adequately, raising concerns about conflicts of interest. Only 2% of finfluencers are registered with India’s market regulator SEBI, yet 33% provide explicit stock recommendations. To protect themselves, retail investors should: 1. Seek financial advice only from registered influencers with local regulators. 2. Ensure that licensed professionals disclose investment risks and provide unbiased information. 3. Distinguish between educational material, general market updates, and direct investment recommendations. 4. Be cautious of promotional material lacking transparency regarding financial incentives or affiliations. 5. Conduct thorough due diligence to verify claims and assess suitability before acting on recommendations. 6. Exercise caution with finfluencers promising guaranteed or exaggerated returns and prioritize information from licensed entities.