While investors may be skeptical of online advice broadly, they tend to trust the specific people they follow.BestForBest/iStockPhoto / Getty Images
Clients who cite and act upon information from unqualified financial influencers is becoming a common grievance among financial advisors.
With more investors using social media for investment information, the chance that advisors are competing with potentially contradictory ideas is increasing.
To understand how “finfluencers” have changed the way retail investors engage with financial markets, the Ontario Securities Commission (OSC) partnered with Montreal-based behavioural science consultancy the Decision Lab to explore the relationship.
While the study released this week found much to lament about the quality and effect of information from social media, it also pointed to ways advisors may counter its influence.
According to the report, more than one-third of investors surveyed made a financial decision based on advice from a finfluencer. Investors said they used social media – particularly YouTube, Reddit and Instagram – for financial advice because it’s free, informative, easy to access and easy to understand.
Notably, trust wasn’t among the reasons cited. In fact, investors generally viewed finfluencers as being self-interested.
From the Ontario Securities Commission report, 'Social Media and Retail Investing: The Rise of Finfluencers'Supplied
But that didn’t seem to matter when it came to investors acting on finfluencers’ advice. Rather, while investors may be skeptical of online advice broadly, the report said, they tend to trust the specific people they follow, making them “vulnerable to low-quality advice.”
The study included a trading simulation with almost 1,500 participants who had a fictional $10,000 to invest. Of those who were exposed to social media posts promoting certain assets, 38 per cent purchased those promoted assets, compared with only 8 per cent among the group of participants who didn’t see the promotional posts.
The experiment demonstrates that finfluencers can “significantly influence retail investors’ trading decisions,” the report concluded.
What’s an advisor to do?
The study comes as the number of investor accounts with online brokerages swelled to almost 12.7 million in Canada as of December, 2024, according to Toronto-based Investor Economics, an ISS Market Intelligence business. That’s more than double the number from before the COVID-19 pandemic.
The Canadian Securities Administrators’ 2024 Investor Index found that almost half (45 per cent) of investors had self-directed investments.
Not surprisingly, the OSC study found that those who work with a financial advisor or portfolio manager were less likely to follow advice from finfluencers. Still, with more clients also investing on their own through online brokerages, advisors may want to counter some of the information clients are absorbing on social media.
The experiment found that certain mitigation techniques helped. “Prebunking” pre-emptively exposes someone to misinformation to counteract it, while “inoculation” introduces a weak form of an argument or misinformation to make someone more resistant to that type of persuasion in the future.
In the context of the experiment, prebunking involved a social media post from a regulator warning that finfluencers may promote unsuitable investments for their own gain. Inoculation did the same, but also included an example of a potentially harmful finfluencer post.
For advisors, countering social media voices may involve a discussion about what kind of financial information clients are consuming and being familiar with some of those sources. That would allow for a discussion that gently pokes holes in some of the claims while reinforcing the virtues of diversification and sticking to an investment plan.
The CSA’s Investor Index found that the proportion of investors who turn to their advisors for information about investing has been declining for several years. The sooner advisors adapt and familiarize themselves with the competition, the better equipped they’ll be to understand and serve their clients.
- Mark Burgess, Globe Advisor assistant editor
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