Experts warn of risks from social media finance influencers
Link copied to
The Morrison government has insisted there’s nothing new about it, but the wave of social media identities providing unlicensed financial advice presents major risks, experts warn.
In a speech delivered on Thursday, Financial Services Minister Jane Hume rejected calls to address the burgeoning crop of influencers who have taken to social media to provide questionable financial advice.
“We have to back Australians to be sensible enough to judge for themselves whether to put their hard earned money into higher-risk assets,” Hume told a conference of the Stockbrokers and Financial Advisers Association.
“Some of the information and opinions that consumers receive from online forums will be bad but some of it will be good, and a lot of it will better engage younger generations in investment and financial markets.”
The comments come as commentators, missing actual financial licences, increasingly gain a profile on platforms ranging from TikTok and YouTube to Facebook and Reddit.
Dismissing the risks posed to a young and inexperienced audience, many dipping their toe into the market for the first time, Hume compared the unsolicited advice to the type that has perhaps always existed.
“The TikTok influencer spruiking Nokia is not that different to the bloke down at the pub who wants to tell you all about the really great company he just invested in but with a much louder voice,” Hume said. “As has been the case since taxi drivers started giving stock tips, it is an inevitable part of a financial ecosystem.”
Ruling it out as ‘financial advice’ entirely, Hume compared influencers to a new generation of commentators, saying they were much like the Barefoot Investor Scott Pape or Money Magazine’s Paul Clitheroe.
However, such a comparison ignores the fact that both men have held financial licences, and were in the view of the law, qualified to speak on those topics. Clitheroe for one, ran a financial planning firm for years. Penalties for providing unlicensed advice is punishable by prison and six-figure fines, under Australian law.
Beyond that technical discrepancy, there are a great many other reasons why the government and regulators should be a little more concerned with the type of financial advice proliferating online.
For one, those online are driven by entirely different factors to the man on the street or by the bar, according to RMIT University senior finance lecturer Angel Zhong.
“The bloke at the pub does not make profits from telling you about the great company he just invested in. On the contrary, social media influencers generate income based on the views of their contents. As such, their motives are different,” Zhong said.
“There is also a possibility that the influencer has a vested interest in the company, ETF or other investment products that they recommend.”
Accordingly, they might have various specific reasons for wanting to drive what could potentially be thousands of people to buy a certain product. More money being pumped into as stock or a cryptocurrency for example could help them cash out their own stake.
Certainly, the type of ‘investing’ that is often encouraged online skews towards riskier assets.
“Investment advice provided on social media tends to encourage day trading, promote get-rich-quick schemes and FOMO (fear-of-missing-out),” Zhong said.
“Many videos and posts have also been encouraging investors to borrow money to invest in cryptocurrency, which suffered a huge loss in the recent crypto crash.”
It comes as financial advisors complain that regulation in recent years has hurt the industry, forcing many advisors out entirely and made good financial advice unaffordable and inaccessible for many.
Conversely, unlicensed influencers have found unprecedented audiences during a rare moment of market exuberance. As many have pointed out, markets have not seen this level of unrestrained enthusiasm in more than two decades.
Hard data meanwhile confirms hundreds of thousands of Australians began trading shares for the first time during the pandemic. Social media has become the primary source of information for one in three Australian investors.
While there’s plenty of good to be said about Australians becoming more involved with their financial affairs, and investing for the long term, there’s also plenty of speculative behaviour that has largely been encouraged online.
The latest ignition of the cryptocurrency market, and the rise and fall of coins based on little more than memes, is but one indication of the risks.
“The large influx of young and inexperienced investors in the share market further highlights the importance of considering having explicit measures in place to warn vulnerable viewers about the reliability of financial advice in social media,” Zhong said.
“Unverified investment advice is no difference to fake news, which is frequently flagged by social media platforms that urge viewers to read with caution.”
Judging from the government’s comments this week, such warnings look unlikely to appear on online investment advice anytime soon.