Social networks: Investing under the influence
Do your clients suddenly want to invest in cryptocurrencies, NFTs (non-fungible tokens), cannabis or “meme stocks” (stocks driven by or on social media)? Chances are they’ve heard about them through financial influencers on sites and networks like TikTok, YouTube or Instagram.
A lucrative business
Several factors have contributed to the popularity of financial influencers. The very sharp rise in the value of cryptocurrencies in 2020 and 2021 fueled young people’s curiosity about a financial product supported by online platforms and influencers, but viewed with suspicion by registered advisors.
The emergence of financial robots and free brokerage platforms also played a role. Much of their marketing was aimed at young people. ”They attracted them with playful tools that made investing look almost like entertainment,” observes financial planner Fabien Major.
Then came the pandemic and the lockdowns. ”People stayed home more and a lot of young people started watching videos from financial influencers and got interested in investing,” explains Julien Brault, founder of HardBacon. We went from 20,000 to 250,000 unique users between 2020 and 2022.
As this audience has grown, so has the number of financial bloggers. The profession can be very lucrative. The CMC Markets study found that the ten most popular financial influencers earn between $1,300 and $7,040 per video published. Erika Kullberg, who tops the list, has 8,900,000 followers on TikTok and earns US$100,000 per year from her YouTube videos alone.
A poorly supervised activity
The presence of these influencers is not all negative. “There’s a renewed interest in financial issues among young people,” says financial planner Marc-Olivier Desmarais. “Of course, we do come across some dubious characters on social media, but we also find credible speakers, like Pierre-Yves McSween, who make these topics more accessible.“
He notes that more and more young people are contacting him to discuss financial planning. “Many understand the value of advice beyond the consumption of financial content on social media,” says Desmarais.
However, the activities of financial influencers remain largely unregulated, with several gray areas that can trap some investors. There’s a huge variety of profiles among them,” admits Julien Brault. Some act in good faith and have solid expertise, but others are much less reliable. There are also people who push products or are outright fraudsters.”
Influencers who are paid to promote a financial product don’t always make that clear. In a famous case in the US, the Securities and Exchange Commission (SEC) fined Kim Kardashian $1.26 million for promoting a cryptocurrency without disclosing that she was paid $250,000 to do so.
Option consommateurs published a report on the subject in 2021. “We’ve noticed that influencers’ messages don’t always clearly indicate that they’re advertising, and there’s a lot of confusion among their audience,” explains Clarisse N’Kaa, an analyst for the publication.
For example, influencers may add a keyword such as #pub (ad) or #commandite (sponsor) to their message. But how are these tags to be understood? In some cases, the brand owner has a lot of control over the message, while in other cases they’re simply sending their product to the influencer in the hope that they’ll talk about it. In the case of Kim Kardashian, the SEC did not take into account the fact that she included a “hashtag“ (#ad) in her post.
“The risk increases when it comes to financial influencers because of the notion of advice and because the impact of a financial loss on consumers can be severe,” adds Ms. N’Kaa.
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Who do I complain to?
Someone who has been a victim of fraud can file a complaint with the police and report it to the Canadian Anti-Fraud Center. But other consumer protection agencies tend to kick the ball around.
The Office de protection des consommateurs claims that the influencer phenomenon is relatively new and cannot say whether it has had to deal with complaints of this kind. “If they have, the number is probably very small,” says Charles Tanguay, head of strategic partnerships and media relations. He acknowledges that these influencers engage in forms of advertising, and as such, the office could intervene in cases of deception or omission of a material fact. However, Mr. Tanguay believes that in the case of influencers, the AMF is better placed to deal with complaints.
To date, however, the AMF does not have specific regulations for influencers, and according to its director of media relations, Sylvain Théberge, there are no plans to do so. “We are working more on raising public awareness of the risks associated with the trust that some consumers may place in finfluencers,” he says.
Some regulators are going beyond a preventative approach to the issue. Take the British Columbia Securities Commission. In 2021, it proposed new rules to regulate promotional discourse about financial products. These rules would apply in particular to newsletters, social media messages and videos. They aim to disclose any connections between those promoting a product and that product or its issuer.
“The public has a right to know if someone promoting something is being paid for it or has an interest in it,” says Brian Kladko, manager of media relations and public affairs. While the new rules don’t specifically target influencers, their activities were part of what we were considering.”
The rise of the influencer poses certain risks for consumers. We’ve already mentioned the dangers of fraud, but the main pitfall remains investing in products that are of poor quality or unsuitable for them. Fabien Major notes that a large proportion of influencers, especially those with little financial education, talk quickly and almost exclusively about financial products.
”With an advisor, the question of products comes very late,” he points out. ”There’s a lot of work to be done beforehand to determine the person’s profile, needs, risk tolerance, financial plan, and so on. This work is not done by watching videos on TikTok.”
The videos are also very often lifestyle oriented. People tell their stories, how they made money, how they live, and so on. They rely heavily on the infamous FOMO (fear of missing out), which can become acute when an influencer claims, for example, to have invested in bitcoin just before its value increased - by 302% in 2020.
In this case, the investment is made more out of envy or imitation. This also explains the popularity of products like cryptocurrencies, meme stocks, and cannabis stocks. They appear a lot sexier in a TikTok video than in a course on balanced mutual funds. After all, influencers are there to grow their audience and generate clicks.
Cédrick Jasmin, a 28-year-old financial planner based in Laval, admits that people of his generation like to talk to him about finance. Many visit financial influencer sites, and some invest on their own.
“Young people are used to having access to information very quickly,” he says. “If they want to know how to buy stocks or open a TFSA, they won’t necessarily go to an advisor, they’ll Google it. The problem is that having a lot of information doesn’t make you an informed investor.”
Jasmin believes advisors benefit from being very open with this type of client. “If you ridicule all their suggestions, there’s a good chance they won’t come back to you for advice and will go back to the communities that revolve around influencers,” he points out.
Instead, take the time to listen to their investment ideas, research the products they offer, and explain the pros and cons. And from time to time, let them try out their idea while making sure they don’t invest too much of their capital.
“This will give them a chance to compare their medium- or long-term results with the strategy you suggest for the rest of their investments,” he says. For some, taking a few losses will be the best way to learn to respect risk.