Personal finance has become increasingly popular and accessible thanks to the rise of social media influencers. These influencers advise on various personal finance topics, such as student loan debt management, budgeting, stock investing, etc. Their content has gained a massive following, especially among the younger generations of millennials and Gen Z. According to a 2021 survey conducted by TIAA, these age groups spend the most time managing their finances each week, and a significant portion of respondents indicated they trust social media as a reliable source of financial advice. It’s safe to say that personal finance has gone mainstream and is here to stay.
While the popularity of social media influencers offering financial advice is rising, the quality of such guidance can vary significantly. Remembering that financial decisions carry much more significant risk than trying out a new recipe or hairstyle is essential. Therefore, exercising caution and thoroughly scrutinizing the advice before implementing it becomes crucial. One must ensure they are not acting upon poor recommendations, which could lead to undesirable financial consequences.
According to Alleson Tate, CFP, founder and principal of Avere Wealth Management, social media has expanded access to financial information, particularly for younger investors and individuals from marginalized communities. However, the need for more regulation to accompany this education poses a significant challenge. It’s crucial to evaluate the information you come across in the context of your overall financial situation, even if the advice appears valuable.
Drawing a line between general education and promoting risky financial behavior can be challenging, and the boundary can become blurred. A case in point is the December 2022 incident where the U.S. Securities and Exchange Commission (SEC) charged eight influencers with fraud in a $100 million stock manipulation scheme. The SEC filing alleged that the defendants manipulated stock prices by spreading false and misleading information through social media, resulting in a “pump and dump” scheme. This example demonstrates the grave consequences that could arise from acting upon unreliable financial advice found on social media.
It’s essential to exercise caution and be mindful that not all financial advice found on social media is sound, applicable, or the best move for your finances. According to Judi Leahy, Senior Wealth Advisor for U.S. Consumer Wealth Management at Citi, while processing the information is helpful, acting on it is unnecessary. Social media is replete with financial hacks and a wealth of information, but there are no shortcuts to achieving financial stability. What works for one person may not work for another, so assessing your unique financial situation is crucial before making any decisions. For instance, a social media post may provide valuable information on a Roth IRA or how to create a budget outline. However, relying on this information to determine how much of your paycheck to contribute to a Roth IRA or whether to open one can be risky.
It’s crucial to exercise extra caution when considering financial advice related to investing and purchasing stocks, as these activities involve some risk. Alleson Tate advises being especially vigilant about investment recommendations as implementing such advice can vary significantly for every investor. Risk tolerance, time horizon, and investment objectives are critical considerations often missing when discussing investment principles in a brief 60-second video. As a result, investors must evaluate their circumstances and risk tolerance before making any investment decisions.
Finance advice red flags
Experts advise being mindful of specific red flags when evaluating financial advice from influencers. Judi Leahy cautions against anything that appears to be a get-rich-quick scheme or promotes risky behaviors like not paying off credit card debt, which can adversely affect credit scores and result in long-term consequences. Specific stock and investment recommendations should also be scrutinized. Personal finance is highly individualized, and advice that works for one person may not be suitable for someone else. Furthermore, popularity metrics such as views and follower counts do not necessarily indicate reliability or skill. As Leahy points out, finance is not a form of pop culture.
How to vet financial advice, including sources and qualifications
Determining the qualifications of individuals offering financial advice online can be challenging. However, specific certifications indicate that professionals are qualified to provide financial advice and regulated by federal agencies. Obtaining these certifications is a way to demonstrate competence and credibility in the field of financial advice.
According to Travis Sholin, CFP, a financial advisor at Keystone Financial and adjunct professor of finance at the University of Nebraska in Omaha, the rise of individuals calling themselves financial planners or experts has led to the popularity of the Certified Financial Planner (CFP) certification. The CFP designation signifies that the individual is legitimate and regulated by an agency. In a crowded field where many claim to be experts, the CFP certification serves as a means of distinguishing qualified professionals.
According to Travis Sholin, a financial advisor at Keystone Financial and adjunct professor of finance at the University of Nebraska in Omaha, licensed professionals are typically regulated by either the SEC, the Financial Industry Regulatory Authority (FINRA), or both. They may hold multiple certifications, depending on their licensing and organizational structure. While Certified Financial Planners (CFPs) create comprehensive financial plans that consider all aspects of a person’s financial situation, financial advisors tend to specialize in investments and stocks.
“Finance is not pop culture.”—Judi Leahy, Senior Wealth Advisor for U.S. Consumer Wealth Management at Citi.
The most prevalent certifications in the industry are the series six, seven, 65, and 66 licenses. These licenses indicate that the professional has completed the relevant exams and committed to abiding by consumer protection laws, with the possibility of facing penalties if they fail to do so. A series six or seven license is required to sell mutual funds, whereas a series 65 or 66 license is necessary to trade individual stocks or exchange-traded funds (ETFs). It’s worth noting that individuals without these licenses are not held to the same standards. As a result, licensed individuals are closely monitored, and it’s rare to see them posting frequently.
In addition, they are obligated to disclose any potential conflicts of interest. This is demonstrated by the recent SEC penalty imposed on Kim Kardashian in October for failing to disclose a payment of $250,000 from a crypto company in exchange for posting about their tokens, resulting in a fine of $1.26 million. Several social media platforms, such as Instagram and TikTok, mandate that individuals who post sponsored content must explicitly label it as such. TikTok’s advertising policy also includes specific guidelines for financial videos.
How to get sound financial advice
As per the opinions of the interviewed experts, obtaining personalized and reliable financial advice doesn’t have to be a daunting task, and social media can be a useful source of information. The experts suggest that many certified financial planners and advisors cater to clients across different income brackets and can be a reliable reference to validate any financial advice from social media influencers. Additionally, some financial firms offer free consultations and do not impose minimum charges. At the same time, other advisors may work with clients on a limited or subscription basis, according to Tate and Sholin. Moreover, your bank might offer certain free or low-cost services that could also be beneficial.
Financial advisors, certified financial planners, and Accredited Asset Management Specialists (AAMS) – another category of accredited financial professionals – leverage their clients’ unique interests to create customized plans. According to Dana Palma, a financial advisor at Edward Jones and board member of the Association of African-American Financial Advisors, accredited professionals consider a client’s personal aspirations, interests, and risk tolerance while devising a plan. Palma suggests searching for advisors through reputable firms’ websites and organizations specializing in individuals with specific credentials.
Additionally, there are a variety of valuable online resources that individuals can use to research investments and evaluate the credibility of financial advisors. One such resource is the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck tool, which allows consumers to verify whether a financial professional is registered, licensed, and has any disclosures or settlements. As Leahy advises, it is essential to exercise caution when receiving investment advice from unregistered or unaffiliated sources.
Moreover, federal and state government websites offer resources and educational tools to help individuals make informed investment decisions. In a Twitter video, SEC chairperson Gary Gensler cautioned against relying on advice from celebrities, influencers, and entertainers and instead encouraged consumers to utilize the agency’s EDGAR database to research a company’s financial health and recent filings before investing. The federal government provides a range of online resources for investors, and some states also offer their resources, such as the Department of Financial Protection and Innovation in California.
