Very few financial influencers are registered with regulators as investment advisors.
“Propaganda depends for its effectiveness on the presence of flawed ideological belief,” writes the philosopher Jason Stanley in How Propaganda Works. Politicians cash in on this prior ideological belief already present in people to push through the narrative they want to.
In fact, financial influencers work along a similar line. Many people believe in greed being a good thing and that it’s possible to become rich quickly. Financial influencers who succeed, knowingly or unknowingly, cash in on these beliefs.
And this is how it usually works. Influencers make simplistic videos, reels and posts around how it is possible to become rich and become rich quickly. In order to get a buy-in from the audience, the story sold is that they themselves have done it, and if they could have done it, so can others. It’s as simple as that.
Other than this, they project confidence and mastery over the subject that they are talking about. The projection of confidence and mastery is a performance; an act. As Adam Gopnik writes in The Real Work – On the Mystery of Mastery: “We have a natural bent for taking other people at their own estimation, accepting their presented selves as identical with their actual selves. It is too painful and paranoid for us to do otherwise.”
Further, to legitimise their story, some number-based evidence, usually manufactured, is offered. Like is the case with propaganda or any other mass-market communication, any nuance goes outside the window.
The trouble is that unless one wins a lottery or suddenly inherits some money out of the blue, it is almost impossible to get rich quickly through investing. Even a stalwart investor like Rakesh Jhunjhunwala created a large amount of personal wealth by staying invested in stocks like Titan and Crisil, for many years. And so has Warren Buffett, one of the greatest investors of the late 20th century and the early 21st century. There are stocks that he has been invested in for decades.
In fact, the business model of financial influencers hurts the idea of long-term investing. In order to stay relevant in such a noisy world, influencers need to constantly keep coming up with content: be it reels, posts or long videos for that matter. In each of these videos, there is some advice or recommendation on offer, do this or do that.
Big money or even a decent amount of money through investing is usually made by staying invested for a long period of time and allowing money to compound. In fact, something as simple as a long-term systematic investment plan into a good diversified equity mutual fund, which is allowed to run for more than a decade, can create a decent amount of wealth.
Indeed, the barrage of content put out by influencers goes against this very basic idea, which is a simple principle but psychologically very difficult to implement. The lack of activity at one’s end leads to the belief that one’s not doing anything to manage one’s wealth properly.
While the followers of financial influencers may not benefit from this content strategy, the influencers do. This is in two ways. First, depending on the number of views for their videos and reels, the influencers get paid by the social media companies. Second, influencers get paid by stock brokerages and other financial services companies to plug their products.
So, influencers can be paid by a stock brokerage to recommend that brokerage’s demat account to their followers. They can follow this up with encouraging their followers to trade more. Of course, these are generic recommendations which do not take the risk profile of individual followers into account, helping both the brokerage and the influencers make more money at the cost of the followers, given that data shows that 90 percent of those who trade actually don’t make any money.
Further, the trouble is that the influencers don’t tell their followers that they have been paid to promote a product. In fact, the entire idea of financial influencing falls flat if influencers start revealing that they are being paid to plug products. The halo built around their heads collapses if this is revealed.
But this has happened for a while. In fact, during the crypto boom, even non-financial influencers made money by plugging crypto and crypto products.
Over and above this, the influencers are also selling courses in which they teach investors how to make money. The selling proposition here is that the influencer has a special formula which helps him or her make quick money. The question that the naïve followers do not bother asking is that if there is such a special formula, why is it being shared. Their greed dumbs their mind.
So, the business model of financial influencers clearly reveals that the chances of an investor – who follows them blindly – getting hurt are rather high.
In fact, very few financial influencers are registered with the Securities and Exchange Board of India (Sebi), the stock market and mutual fund regulator, as investment advisors. This stems from the fact that if they become Sebi-recognised investment advisors they won’t be able to do quite a few things to make money that they have been getting away with.
As Rajiv Ranjan Singh writes in a piece in Fortune India: “An investment adviser is not to receive any payment from any person other than the client being advised.” So, a financial influencer who becomes a Sebi recognised investment advisor cannot plug products.
Sebi has recently started cracking down on financial influencers. The trouble is how does a regulator, which works five days a week and has fixed daily timings, police a market which operates 24/7.
Nonetheless, the regulator can carry out education campaigns (of the kind that the Reserve Bank of India does). Active investor associations can be asked to chip in. Of course, they will have to face the power of global social media companies which benefit from what the financial influencers have been up to. The social media companies have a collective voice. The followers of influencers, who have lost money by following the recommendations offered, don’t. Indeed, there are no easy answers here.
Vivek Kaul is the author of Bad Money.
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