Can you afford to take FinFluencers seriously?

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Financial literacy is the foundation of a healthy financial life. Knowing the basics of personal finance help in taking wise decisions and, most importantly, avoiding the wrong ones.

While financial literacy and money management as a life skill has not been an integral part of our education system, social media has been more or less making up for that huge gap.

Particularly in the last decade, people have been lapping up information on personal finance in the form of blogs, videos, infographics, newsletters, podcasts, and so on.

In that context, social media has been a big boon in spreading financial awareness and helping people get through a labyrinth of information. YouTube has been particularly popular; investors find on it videos on a diverse range of personal finance topics like investment planning, stock trading, mutual funds, market outlook and insurance, etc.

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Having said that, it is also a double-edged sword with most investors not capable of comprehending how to use or apply that information to their own personal financial lives. And that is where the real problem starts.

One-size-fits-all doesn’t always work

Financial advice given by self-proclaimed experts is general advice and need not be applicable to anyone and everyone. Following such blanket advice is like taking Over-The-Counter (OTC) drugs consumed without the prescription of a doctor.

But there lies the risk when you do not understand your own body - how it works and what it is vulnerable to.

Similarly, each individual’s financial situation, approach to money, risk appetite, mindset, career ambitions, potential income earning ability, family environment and culture, number of dependants, lifestyle, saving and spending habits are different.

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Let me give you specific examples.

FIRE – Financial Independence, Retire Early -- is quite a trending topic among the millennials and even Gen Z who have recently started working.

Many finfluencers talk about how to retire by 40. Such videos receive tremendous response and that is evident from the questions being asked in the comment section by the youngsters. They will explain in the videos about calculating a retirement target corpus.

The calculations are oversimplified by taking an X amount, which is the expense and inflating the same amount till the age of 40 and then arriving at a monthly figure to start investing for the milestone. Life is then sorted.

But alas, life is more than a spreadsheet or a calculator. It goes beyond numbers. There are many life transitions that youngsters undergo once they are settled in their working lives, get married and take on more financial responsibilities. Most important is the career transition after 40 and how serious a thought has been given to it and the income potential expected from the new career to maintain cash flow visibility. Further, the harsh bouncers that life can throw in the form of job loss, divorce, health problems and the unpredictables like Covid 19 bring a lot of uncertainty to the planning.

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Another popular topic is whether one should buy or rent a house. Such videos talk about all the silly math that goes into calculating whether an individual is better off paying rent or paying interest on a home loan. Real issues like an individual’s unique family situation, his career stability or transitions, his aspirations of owning a home, are ignored.

Further, the typical content like most popular stocks or mutual funds, how to make money in intra-day trading, how to earn regular income from stock market, top mutual funds for Systematic Investment Plans, how to become a crorepati, etc, are popular, especially among first-time investors from interior towns and cities of India.

Is your finfluencer advising or endorsing?

The top 10 YouTube channels in terms of viewers have a subscriber base ranging from 1.5-5 million. Imagine the reach and influence these channels command. With their growing popularity, they are also approached by many financial product companies to endorse their products. This gives rise to conflict of interest, where such product- specific advice is freely endorsed. I recently came across an ad of a popular finfluencer on social media endorsing a guaranteed income plan of a big insurance company. It talked about how one can achieve family goals through these plans! This is contrary to the fact that such investment-linked plans can even hardly beat inflation.

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Qualifications matter; that’s where registered advisors matter

Registered Investment Advisers (RIAs) who operate under the ambit of the Securities and Exchange Board of India with a license, need to have a minimum education qualification and experience to give investment advice.

They also have many aspects of compliance to take care of in terms of KYC (Know Your Customer), risk profiling, contractual obligations, fees chargeable, maintaining records of investment rationale, annual audits and so on. On the other hand, there is no entry barrier on social media and anyone can dole out free advice without having to adhere to any credential requirements and regulatory stipulations.

Can SEBI regulate finfluencers?

The sharp rise in finfluencers giving unsolicited financial advice has made the market regulator worried. It has already cracked the whip on a few using telegram and WhatsApp channels to illegally inflate stock prices. Although SEBI has strongly expressed its intent to put together a framework to govern the growing base of such unregistered advisers, it is a long road ahead for the regulator. For instance, what constitutes financial advice and financial education can be a tricky call to take. Further, to micro-manage each and every handle or account in terms of content will be a herculean task.

Investors meanwhile should at least not blindly follow such unsolicited advice on social media. While consuming information for the sake of financial literacy is good, taking personal finance decisions based on the free information doled out on social media can be harmful. The cost of such free advice, especially product-related ones like stock tips, mutual funds and, insurance is always expensive. Remember, there are no free lunches in this world!