During the pandemic, there was a boom in so-called finfluencers or financial influencers. A major reason for the flood of such profiles on social media was the insane rise of the crypto market at that time, so many wanted to jump on that train, if not by investing, then by giving investment advice because every click is important and brings a certain profit. The pandemic eventually faded, i.e., at the beginning of Russia’s attack on Ukraine, the public focus shifted to the war, and Covid fell into slight oblivion literally in one day. However, finfluencers remained and continue to advise their followers on where and what to invest in.
Perhaps ‘scrolling‘ through social media is not the best place to find your financial advisor, and this is confirmed by a study conducted by the Swiss Financial Institute, which shows that advice from only 28% of surveyed finfluencers actually led to positive returns. However, 56% of them gave recommendations that led to money loss, and 16% of them provided no value at all.
Still, unqualified financial finfluencers, those who give their audience advice that causes them to lose money, have more followers even though they achieve a negative 2.3% monthly return, the research showed.
The authors, who focused on data from as many as 29,000 accounts, stated that there are several reasons why the poorer ones have more followers.
First, these finfluencers have no real duty to give good advice, and it is not necessary for finfluencers to be right to retain followers.
Second, small investors seek influential people on social media who share the same behavioral traits. Moreover, the message is more important than the messenger, the study states, and investors are often attracted to positive views preached by unqualified financiers.
Following the advice of unqualified finfluencers creates overly optimistic beliefs most of the time since their posts tend to reflect the mood of the majority of stocks – wrote the authors of the study.
The authors found that despite their popularity, the advice of bad finfluencers can yield about 1.2% monthly return for anyone betting against their advice.
Who to follow
So how to know whom to follow among all the numerous amateur financial advisors? The study states that the frequency of posts, tone, and number of followers are something to pay attention to.
One might think that finfluencers who post more are experts and have more valuable information. However, this is often not the case, and fewer followers and posts are a typical sign of a skilled finfluencer – they conclude in the study.
Given that unqualified finfluencers tend to drive investment sentiment, their tone will follow the broader market sentiment. This means they will post positively after gains and negatively after losses, while skilled accounts do the opposite, it is stated.
Investors will also want to avoid the 16% of finfluencers who are unqualified or do not offer any return. To find them, one should look for signs such as active accounts with few likes, finfluencers promoting multiple ideas, or accounts praising ‘hot’ stocks highlighted in the news.
