Younger investors turn to ‘finfluencers’

Is this the age of the social media ‘finfluencer’?

While social media is successfully engaging previously underrepresented market participants, these investors may also face elevated fraud risk because of knowledge gaps, according to new research from the FINRA Investor Education Foundation.

The research, Finfluencer Followers and Social Media Scrollers: The Profile, Patterns, and Pitfalls of Social-Media-Informed Retail Investors, examines retail investors who use social media and follow finfluencers to inform their investment decisions.

The following are among the study’s findings:

• Demographics. Social media users and finfluencer followers were predominantly younger (60% of investors aged 18-34 use social media vs. 9% of those 55 or older; 61% aged 18 – 34 made an investment decision based on recommendations from a social media personality vs. 6% of those 55 or older), male, had lower portfolio values and were more likely to be a person of color than those who do not use social media or finfluencers to inform their decisions. Nearly half reported not identifying as “typical investors.”
• Knowledge-confidence gap. Social media users and finfluencer followers often exhibited overconfidence, with more rating their subjective knowledge high while scoring low on objective investment knowledge tests compared to non-users or non-followers. Social media users and finfluencer followers answered an average of 42% questions correctly on an objective investment knowledge quiz, yet 63% rated their investment knowledge as high.
• Fraud risk. Social media users and finfluencer followers reported substantially higher exposure and victimization. Among those who were targeted for fraud, 68% of social media users and 69% of finfluencer followers reported losing money to fraud (compared to 29% and 26% for non-users and non-followers, respectively).
• Information-seeking. Social media users consulted an average of 7.6 information sources versus 4.0 for non-users and were more likely to check the background of a financial professional (36% vs. 14%).
• Non-monetary motives. Social media users reported significantly stronger motivations beyond profit motives for investing. These include entertainment (59% vs. 18% for non-users), social activity (59% vs.11%) and supporting personal values (66% vs. 31%).

Who are finfluencers?     

How does the survey define finfluencers? “In our survey, we define ‘finfluencers’ as social media personalities who provide investment recommendations,” explained Olivia Valdes, senior principal researcher, FINRA Investor Education Foundation.

“This broad definition encompasses a wide range of influencers, including those whose platforms focus mostly or exclusively on providing financial information or guidance, as well as personalities whose primary content lies outside of financial or investing topics, but who nonetheless provide investment recommendations users rely on.”

Why younger investors use finfluencers

What might be some of the reasons why younger investors are turning to finfluencers? Young investors may be seeking out finfluencers because they feel more connected with them in terms of their background, age or life situation, according to Valdes.

When surveyed, nearly half of investors under 35 indicate that people like them aren’t typically investors, Valdes added. “While we cannot be certain that this lack of investor identity is driving young investors to seek information from finfluencers, the data reveal a notable pattern: 47% of those using finfluencers agree that people like them aren’t typically investors, compared to only 25% of non-followers,” she said.

Another possible reason could simply be exposure, Valdes added. Social media use is widespread among young adults, with many engaging daily. Among investors, 61% of those under 35 rely on social media for investment information. Even those who may not be actively seeking investing content can be exposed to finfluencer material while browsing social media, creating an organic following, she added.

The risk of fraud

As to some of the fraud risks that these investors may face because of gaps in their financial knowledge, Valdes said finfluencer content varies widely in quality and appropriateness. Deciphering whether specific recommendations align with your life circumstances requires an understanding of financial topics such as investment risk, financial instruments and fee structures. Given that some online content may be incorrect or even fraudulent, financial knowledge can serve as a critical tool for identifying investment fraud, she added.

Understanding concepts such as reasonable return rates for different asset classes and the risks associated with various investments is essential, Valdes added.  “Unfortunately, we find that half of investors are unable to identify the hallmarks of investment fraud — including 72% of those who follow finfluencers,” she said.

Helping to close the knowledge gap 

The financial services industry can take several steps to help close the knowledge gap. As Valdes pointed out, “We know that in-the-moment education is effective. Providing investors with access to high-quality financial education that is immediately applicable is important for closing knowledge gaps and ensuring they are able to make informed investing decisions. “

“Additionally,” Valdes said, “integrating fraud education and providing investors with reliable, unbiased tools and protective strategies, such as naming a trusted contact to your investment account, can help them safely navigate their financial journey.”

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