How Not To Fall In The Finfluencer Trap

We live in an area of influencers who tell us what to eat, what to wear, where to travel and also how to invest our money.

When it comes to the last one, there can be a problem. In 2022, many financial influencers or influencers were promoting a Singapore-based Crypto firm called Vauld.

When Vauld landed into trouble and suspended withdrawals, many investors lost a large amount of money. Many of the well-known influencers who were relentlessly promoting Vauld, came out with a holier-than-thou attitude and tried to defend themselves. But the damage was done.

In fact, a recent research study conducted by Navi Mutual Fund has found evidence of over-reliance on social networks and "finfluencers" with 80 per cent of investors relying on social networks and "finfluencers" for investment information, which can be a risky affair.

When you are not well, you go to a doctor. Googling your illness or listening to some viral video is something that never helps. It is the same when it comes to financial advice.

Seeing Is Believing? 
Finfluencers may influence (not always mentor or coach) your financial decisions. "The person can use any social media to do that. You believe him to be an expert he may or may not be. Since he is on media, it is one-way communication. He gives his knowledge which may lack meaning, clarity and personalisation," says Madhupam Krishna, SEBI registered investment advisor (RIA) and Chief Planner, WealthWisher Financial Planner and Advisors.

For a person using social media to increase his followers, personal finance is just one category where they can bring more subscribers. More views and followers mean they get more money from the platform, and advertisers and by cross-selling their courses & material, etc.

"So they pose as experts and you readily fall in the trap.  You think he is well-researched. You are keen on saving time. So you blindly follow and burn your hands. At present, although SEBI has mandated that all influencers need to be registered with SEBI, still the implementation of norms is lacking on the ground," Krishna. 

Have Basic Knowledge of Personal Finance
You should at least have your own knowledge and research to know what to follow and what not. For this, you must read the content provided by various personal finance websites. 

"These are serious people and present an all-round view. Most mutual fund and stock brokers have blogs on their website and they curate a lot of timely articles. This source can be treated as the primary source of information," says Krishna. This is important, because if you do not have the basic knowledge, it is easier to fall prey to the spiels of a finfluencer who does not have your best interest at heart. 

Check Credentials Of The Influencer 
To avoid unqualified financial advice from finfluencers, investors should verify their credentials and ensure that they are registered with regulatory bodies like SEBI. For example, if someone is a SEBI RIA, you can trust that person when it comes to financial advice.

"They should also check for professional qualifications such as CFA or CFP of the finfluencers and ensure that any financial incentives or partnerships are fully disclosed. The quality of content of various influencers need to be assessed and those who provide detailed, consistent, and educational information over hype-driven posts need to be favoured," says Jyoti Garg, Assistant Professor of Finance and Accounting at the Great Lakes Institute of Management, Gurgaon. 

Similarly, Financial Planning Standards Board (FPSB) offers a directory of Certified Financial Planners and Association of Mutual Funds in India (AMFI) provides a list of registered mutual fund distributors. "Investors need to be sceptical of promises of guaranteed high returns and fully understand the risks involved to further protect themselves from misleading advice," says Garg. 

Potential Red Fags 
The primary red flag for investors is the "promise or expectation of an unrealistic return" from a finfluencer. "If a finfluencer suggests or offers returns on an asset class that significantly diverge from historical averages without providing tangible evidence or explanation, it's a clear sign to proceed with caution," says Pankaj Sharma, Senior Manager for Capital Markets Policy at CFA Institute. 
Another important check is whether the finfluencers are discussing complex instruments or "hard-to-follow" investment strategies. "Following financial advice without understanding how it works or how it generates money is a recipe for disaster. Additionally, if there is no possible way to verify the claims a finfluencer is making, then one should be extra cautious about their credibility," says Sharma. 

As Paul Samuelson wisely said, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." 

"If a finfluencer focuses more on the entertainment aspect of their content rather than the quality of their investment advice, it should immediately raise a warning bell," says Sharma. 

Better Be Safe Than Sorry 
However, one may say that not every finfluencer may have a qualification or a degree, and does that mean that one should not take any advice from such a finfluencer? To be on the safer side, you should not. However, there could be those who might not have the required qualification, but may have achieved success in business or some other sphere. You may even look up to such people and want to follow their financial advice. What to do in that case? 

When you are acting on the advice on a finfluencer, it is always advisable to double check with someone you can trust. Never commit large sums of money to any sort of scheme that offers returns that are too good to be true. Because anything that is too good to be true, often is.