Opportunistic exploitation has marked the rise of finfluencers

In the last few years, financial influencers—or finfluencers as they are widely known—have become very popular. In their bid to make money and drive up the number of their followers, they have done pretty much everything from explaining the basics of personal finance to recommending stocks, cryptos and even real estate.

So, what explains their popularity and why have they become popular only in recent years? There are several reasons.

First, the rise of cheap smartphones and rock-bottom internet rates have led to increased individual content-viewing on smartphones, as opposed to families watching TV together earlier. This has led to people watching stuff on YouTube, Instagram, etc, and helped everyone from streaming platforms and famous journalists running their own YouTube channels to finfluencers.

Second, the work-from-home covid years gave people more time to watch content, helping finfluencers showcase their content and build an audience.

Third, unlike financial advisors on TV, finfluencers spoke to a young generation—newcomers to the world of money—in a language they understand.

Fourth, whether or not finfluencers have a good understanding of what they are speaking about, they do so with a lot of confidence. This helps get credibility. As Dan Gardner writes in Future Babble: “If someone’s confidence is high, we believe they are probably right: if they are less certain, we feel they are less reliable.” Indeed, finfluencers are able to do this because their target audience is largely unaware of the subjects they are speaking about, and is often looking for some hand-holding.

Fifth, their sales pitch is typically built on the proposition that “if I can do it, so can my followers,” which is why any nuance is usually edited out and any talk of luck that one needs or the risk that one faces while investing goes out of the window. This helps cater to a mass market. Most people are already busy handling the pressures of daily life. So, when it comes to investing, they like being told exactly what to do.

Now these are the most obvious reasons behind the popularity of the finfluencers. But there are two more not-so-obvious reasons as well.

First, the covid pandemic led to interest rates falling to very low levels, encouraging investors to divert their money into other asset classes—everything from stocks to cryptos. Stock prices went up at a fast pace after March 2020 and the price of cryptos went through the roof in 2021. This spread the belief that it was possible to get rich quickly. Finfluencers cashed in by being at the right place at the right time.

Second, investing is a very simple exercise, but one that is psychologically very difficult to follow. An investor needs to spread investments across different asset classes, invest regularly for the long-term, and wait for the investment to compound. But the simplicity of this and the fact that one has to wait tend to result in impatience. The human mind wants to tinker and fiddle around. This is where finfluencers with their regular myriad recommendations—of doing this and doing that—come in. In a world not connected by the internet, it wasn’t easy to cash in on this human vulnerability. You had to get many people into a room to tell them it’s easy to become rich quickly, something that Ponzi schemes and multi-level marketing companies did manage to do.

Nonetheless, unless one inherits money, steals it, enters an investment bubble in its early stage and has the guts to ride it all the way and the sense to sell right at the top, or is lucky enough to be in the top echelons of a startup that VCs are backing with a massive valuation that neither current earnings nor future earning prospects justify, it’s almost impossible to get rich quickly.

The trouble is that just being popular isn’t enough because a living also needs to be made. Finfluencers make money from social media companies. They get paid on the basis of the number of views their content gets. They also get paid by companies and brands for recommending their financial products; but the fact that they are getting paid for saying something that they are isn’t always made clear simply because the moment they say they are being paid by someone to offer financial advice, their credibility goes for a toss.

Some finfluencers have even indulged in front-running by recommending a stock they already own. Once purchases by their followers have pumped up its price, they have sold their holdings and made money.

Again, this is a function of the fact that stock prices shot up after March 2020. In fact, as Walter Bagehot writes in Lombard Street, a book published in 1873: “The good times… of high price almost always engender much fraud.” The fact that finfluencers have indulged in outright fraud or that they forget to mention that they are being paid to recommend something stems from this.

To tackle this, late last week, the Advertising Standards Council of India revised its guidelines for influencers operating in the banking, financial services and insurance domains. If such influencers are to offer investment advice, they need to compulsorily register with the Securities and Exchange Board of India. Now it remains to be seen how effective these guidelines will be in a fast-changing digital world.