Over the past few years, social media influencers have gained immense prominence as more users continue to join social media platforms. These influencers create content in the form of photos and short and long videos, usually focusing on a particular topic.
For example, some influencers focus on wellness, while others focus on fitness, art, politics, education, etc. Others stay true to trends, changing their area of interest with the latest trends. Influencers, like all celebrities, use their connection with their audience to sell products from different brands. Brand ads are embedded in content produced by these influencers.
In recent years, high returns on financial assets have attracted a large number of investors to the financial markets. Google Trends shows a 20x increase in searches for the word “crypto” between September 2020 and November 2021. The keyword “stocks” has a much smaller increase of 2.5x, over the same period.
The increase in retail interest in the markets boosted companies whose investment products were primarily aimed at retail customers. These companies, which often sell crypto-related products, mutual funds, or stocks, have hired influencers to advertise their investment products. But ultimately, influencer marketing appears to have led to multiple instances of mis-selling, a major problem in the financial services industry.
What is the Vauld crisis?
Recently, a number of prominent social media influencers released public statements after Vauld, a crypto lending platform, halted withdrawals from the platform. The company had conducted an influencer campaign with these influencers several months ago.
Its product was marketed as a “fixed deposit” which was safe and offered investors significantly higher returns than a normal fixed deposit. Yields have gone up to 12%, which is quite high for a “fixed deposit”, given that the risk-free interest rate is much lower. Chances are, such returns would likely necessitate increased risk unless the markets were extremely inefficient.
The videos of these prominent influencers constantly refer to the “crypto fixed deposit” product sold by the lending platform. Now these videos have several new comments from retail investors who have invested in the product, talking about the significant sums of money they have lost.
However, this is not the first time that social media has been used to deceive investors. A few months ago, some Twitter influencers came under fire after tweeting about Salasar Techno Engineering Limited (STEL). These influencers were allegedly contacted by agencies who paid them to tweet about STEL, in order to boost the listed company’s share price.
In other cases, Telegram groups have been used to drive up illiquid stock prices where group owners take positions in the stock before making recommendations on these groups. The modus operandi used by stock manipulators has changed with the advent of social media.
Until a few years ago, investors often received calls and messages from Indore-based companies offering expert advice on illiquid stocks. Today, social media offers a chance for these manipulators to reach investors for free and on a larger scale.
Questionable advice from influencers
Besides these direct violations, financial influencers have been known to distribute superficially researched stock ideas, questionable financial advice, and dangerous investment ideas, among others.
In part, the blame for below-average content lies with the audience these influencers are targeting. The public is interested in oversimplified and short financial advice, rather than understanding the complexity of the investments they are about to make.
As a result, abbreviated content offering oversimplified advice often receives high engagement, compared to hour-long videos discussing the nuances of personal finance/investing. Since engagement and followers are two important metrics that influencers track closely, they create content preferred by the audience they target.
As a result, we end up with terabytes of similar short-form content that only hypes brands, but little to no real value to our financial journey.
Trading course vs trading
Some of these fintech influencers claim to be traders with wallets worth tens of crores. It is therefore quite surprising that they devote their time and efforts to advertising brands, for relatively small amounts. Others even run courses that teach trading strategies to beginners.
Anyone with a basic understanding of stock markets would realize that it is quite difficult to develop a sustainable competitive strategy in the markets. Once a trading strategy is known to a number of market players, everyone jumps into that trade, making it rare and unprofitable.
Therefore, professional fund managers prefer to operate discreetly, in order to prevent anyone from stealing their ideas or strategies, unlike social media marketers. If someone gives his competitive advantage developed over many years, in exchange for a few thousand rupees, the motive must be questioned.
“Finance gurus” have been around for a long time, but technology has democratized the ability to be a guru. Previously, these “experts” had only a few top TV stations, newspapers and magazines through which they could reach the masses.
But today, social media has removed all barriers between experts and the masses. Therefore, it is of the utmost importance that investors learn the difference between charlatans and real experts. Influencers have helped demystify finance for millions, but followers should also be aware of the possible negative impact.
In general, influencers have little skin in the game, with a significant upside and asymmetrically low downside, in case things go south. The recent debacles are a lesson for retail investors to stop depending on five-minute videos and superficial explanations, before investing a significant portion of their hard-earned money in products touted by influencers.
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