Social media is a powerful and ubiquitous force in the lives of most Americans, for good or ill. Vacation pictures, product reviews, cute animal videos: good. Investment advice: not so much.
A recent Gallup poll confirmed previous surveys suggesting that Americans are increasingly turning to online social media platforms for financial advice, with adults under 30 now relying more on TikTok and Facebook than on professional financial advisors for investment recommendations and guidance. The results have been predictably and persistently concerning.
A cadre of online influencers dispensing financial advice, dubbed “finfluencers,” presents a dilemma for millions of followers. There are certainly qualified professionals providing useful information on social platforms, but on average, investors would be better off betting against finfluencers than following their advice.
The Securities and Exchange Commission requires that individuals who are compensated for giving specific investment advice must be registered and comply with certain standards. Registered investment advisors are held to a strict fiduciary duty, while brokers must adhere to a somewhat less rigid “best interest” standard, but all financial professionals have a defined duty of care with respect to their customers. In addition, registered representatives and investment advisors must pass examinations demonstrating at least minimal knowledge of investment products and legal requirements. Some go on to attain advanced credentials like the CFA or CFP designations and typically complete annual continuing education.
Finfluencers, on the other hand, operate largely outside the regulatory framework. It is hardly surprising then that most of this unsolicited and unregulated financial counsel from these self-proclaimed experts ranges from useless to harmful, with real-world monetary impact.
A 2023 paper published in the journal of the American Economic Association builds on previous research quantifying the (in)competency of finfluencers and wrestles with the question of why followers continue to take their bad advice.
The authors collected a trove of 72 million tweets on Stocktwits, a popular investment-related social media platform, as well as data from Bloomberg, to evaluate the efficacy of investment advice posted on the site. The results were even worse than expected.
Individual investors can easily expect to earn a market rate of return on investment in a particular asset class by simply investing in broad index, say the S&P 500 or the U.S. Aggregate bond index. In theory, one could “beat the market” through insightful security selection or timing, which, while exceptionally rare, sometimes occurs at least in the short run. This incremental outperformance over the passive benchmark return is known as “alpha.” The researchers evaluated the alpha generated by 29,000 finfluencers on Stocktwits and then stratified them by effectiveness. Wanna guess how it turned out?
They found that 28% of finfluencers were skilled, providing useful information that yielded additional monthly return (positive alpha) of 2.6% on average. Ineffective finfluencers, which they called unskilled, represented 16% of the total and generated zero additional return. Meh, no harm, no foul. The majority, however, 56%, were “antiskilled,” meaning they generated negative monthly alpha of -2.3%. Further, the researchers estimate that investors who bet against the antiskilled purveyors by doing the opposite earned an additional monthly return of 1.2%.
Yet what intrigued the authors most was the degree to which followers of antiskilled finfluencers persisted in acting on demonstrably bad advice.
They discovered that the antiskilled post much more frequently, and the tenor of their posts was consistently more optimistic. They tend to be performance chasers, amplifying positive historical trends, unlike their skilled counterparts who are more contrarian. Because the higher frequency of their posting encouraged engagement, the contributors who offered the worst advice attracted the most followers. While this may seem counterintuitive, it is consistent with the wider issue of misinformation spread on social media thanks to both human nature and insidious design.
Misinformation is hardly new, but social media has supercharged it. For instance, investigators at MIT found that false information on social platforms is 70% more likely to be reposted than factually correct data, and that it takes six times longer for true stories to reach the same size audience as a false story.
Complex processing capabilities known as algorithms are constantly monitoring and mining users’ viewing habits and altering their feeds to provide more content of the same type, creating a powerful feedback loop. The result is called confirmation bias, where the user receives more content that matches and reinforces their existing beliefs. This creates a siloing effect that is known as homophily, limiting content to comport with the user’s preferences and limiting heterodox content. Few people (except conscientious investment professionals) seek contrarian opinions. Skilled finfluencers are broadly contrarian and therefore do not gain the same degree of engagement even if they are right more often.
This echo chamber effect on social media is well known in infectious disease policy and is so prevalent that a new specialty has emerged: infodemiology, the study of how public health is impacted by disinformation like the proliferation of vaccine skepticism during the pandemic. For example, it is estimated that false COVID information was viewed 3.8 billion times on Facebook alone during just the first half of 2020. Similarly with the rapid spread of debunked election interference theories.
Followers of social media finfluencers also run the risk of falling victim to conflicts of interest. Monetization of an online persona often means commercial arrangements and sponsorships that may not be disclosed for touting financial products or making recommendations that are not permissible by unregistered persons. Famously, Kim Kardashian agreed to a $1.26 million settlement in 2022 for promoting a cryptocurrency to her followers without disclosing a $250,000 fee for doing so. Regulators are struggling to keep up.
All of this is not to say that online resources from investments and financial planning are not valuable, and some social media personalities offer beneficial advice. But most offer limited or even harmful counsel with limited or no regulation or oversight, and popularity is not a reliable indicator of skill. Often just the opposite.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.