How to influence finfluencers (in five easy steps)
There are no easy steps in regulating the space. It will need to be a mix of regulatory outreach to regulated entities and investors going beyond fear and greed
When finance minister (FM) Nirmala Sitharaman took note of finfluencers in India, saying that many of them are misleading people, the issue festering under the surface came up for a more public debate. The ability of an individual to reach many people without the checks and balances of the old-style media, with editors as gatekeepers, has democratised the field. Along with the benefits of removing the ideology-based gatekeeping, it has also allowed field experts to reach out with their knowledge directly. But it has also allowed a new crop of (mostly very young) “experts” who are encouraging others to change their investing behaviour. These “experts” seem to have neither the knowledge nor the intent to act as a long-term fiduciary. Led by the FM’s statement, the regulators will now put in place a set of rules that hope to solve the market failure of conflicted advice and opinion. But investors, too, need to do their share.
While issues like pump and dump (talking up a stock and selling when the price is high, leaving investors holding dud stocks) can be caught by a regulator, financial influencers or finfluencers fall into a regulatory crack. Is it an opinion, or is it advice? Should they be regulated, or does their work fall under the head of free speech in a buyer-beware market? These are difficult issues that need to be solved as the resentment against such influencers bubbles over.
This became manifest when I carried out a dipstick survey on this issue on my social media handles that have a largish following from either people in the financial sector or those interested in learning about managing their money. I got many replies quickly and am thankful to each person who took the time to give very nuanced and thoughtful replies.
I asked the question: “What are the ways in which you think some financial influencers mislead investors? Is it just on return expectation or other issues as well. Examples?” You can see the tweet here: https://twitter.com/monikahalan/status/1656307847263662080?s=20
The replies I received highlight five areas of concern.
One, is lack of disclosure. Often, once the follower count of the influencer is big, firms reach out to the influencer to reach his or her followers with messages that are more of an advertisement than an endorsement. An endorsement is positive messaging about a product that somebody has used and found good. That distinction is important. When the endorsement is paid for by the beneficiary company, it becomes an advertisement. Followers need to be able to separate the ad from the true opinion. Disclosures are needed for paid product placements within the content, for payments to influencers for opinions or advice that has a commercial entity paying for it and for any other form of gratification in lieu of a promotion.
Two, lack of knowledge. It is scary for veteran market-scarred investors to listen to people who have never seen a longish bear market, promising bullish stock markets as the gift that keeps on giving. The glib promise of money growing faster than fixed deposits over short periods of time is untrue. This lack of knowledge comes across in many forms – confusing investing in the markets with trading, assuming all debt funds to be risk-free, or the bundling of a credit risk fund in a “safe debt’ strategy. The lack of both experience and depth of knowledge is a risk factor for the followers.
Three, playing on greed and fear. The two emotions that drive human behaviour in investing are used by the influencers to drive their followers into risky products and investing strategies. Big promises on return expectations, their own example of living the rich life by following an-overnight rich scheme and creating the FOMO (fear of missing out) narrative are some of the routes that influencers take to drive their followers into taking financial action. Some also use the tool of name and shame – naming a financial product, say an FD, and then shaming people who are still using it.
Four, outright lies on return expectations. This has been the case with the pumping up of crypto “currency” and the “exchanges” as the next big thing. The chimera of turning ₹50,000 into ₹5 crore almost overnight has driven thousands of crores in India into such instruments. With no underlying product or service, a digital token is just a token. It has no underlying value. Without that basic fact in place, tall stories of the rich life have been woven by fairly respectable influencers with degrees in finance or management.
Five, there is seldom any conversation on risk. A two-hour “course” made the assumption of using the tax-saved from a home loan, to be invested in the stock market for a 15% return to calculate the benefit of taking a loan over a larger down payment. The risk of a flat market for five years is never considered. The fact that each non-guaranteed financial product carries a varying degree of risk is simply not told.
Regulatory limits
As the influencer bubble begins to burst, questions on regulatory action are beginning to be heard. But this is a sticky ground for regulators as they need to walk the tightrope of not curbing free speech and opinions and regulating conflicted advice. This is now a global issue, and some regulators are taking hard steps. For example, the Securities and Exchange Commission of the US stuck a $1 million fine on reality TV celeb Kim Kardashian for not disclosing a paid cryptocurrency promotion. She was asked to return the $250,000 fee she got as well. You can read about it here: https://www.sec.gov/news/press-release/2022-183.
Three years ago, Steven Seagal was hit by $300,000 (disgorgement plus fine) for a promotion that was paid but not disclosed. You can read the report here: https://www.sec.gov/litigation/admin/2020/33-10760.pdf. These are exemplary town square hangings designed to instil fear in the hearts of others.
Australia is considering far harsher measures, such as jail terms for misconduct. A pump and dump con artist Gabriel Govinda was sentenced to two-and-a-half years imprisonment and fined for “market manipulation and finfluencer conduct”. You can read about this here: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-116mr-gabriel-govinda-sentenced-to-two-and-a-half-years-imprisonment-and-fined-for-market-manipulation-and-finfluencer-conduct/
The Indian capital market regulator is rightly wary of wading into a large, complicated and multi-regulator market with a prescriptive set of rules. The difference between an opinion and advice can be debated. And too strict a regulatory action will be seen as a curb of free speech, even stifling voices that are genuinely working with literacy and investor education initiatives.
According to news reports, the Indian regulator, the Securities and Exchange Board of India, is planning to use a two-pronged approach, One, get the regulated entities such as brokers, traders and mutual funds to be responsible for the messaging they are paying influencers for. Two, go after the pump and dump con artists with legal action.
Are investors blameless?
The lack of financial education through schools and colleges, along with the impatience of youth, makes for a gullible set of young Indians who are taken in by the funny videos and smart one-liners into risking their money. But ignorance is no defence. Investors must look in the mirror and see it is both the fear of being left behind and the greed for a good deal that motivates them to jump into the deep end of investing without adequate skills.
I was horrified to see a trading strategy ad where a minor is being showcased as having made a few lakhs in a month by following the trading system hawked by the influencer. Blood lust for quick money was visible in the admiring crowd that had paid good money to be in the room.
What lies ahead? Some regulatory action. Some expensive lessons learnt by investors who have lost money. Some reputations gone to dust. Some VC money was burnt. The takeaway for investors is just this: If you don’t understand the risk of an investment, stay away.
Monika Halan is the author of the bestselling book Let’s Talk Money. The writer works in the space of financial education and literacy.
The views expressed are personal
