Beware of influencers bridging the financial advice gap

Do you want to be financially free, build your wealth and retire at 30? Judging by the growing number of people watching and liking this type of video content on TikTok and Instagram, the cost of living crisis has increased the supply of those looking for a quick solution to their finances.

Follow some “influencers” and you will invariably find that the path to wealth is to borrow money and invest it in high-risk assets or pay for a course to teach you trading secrets (spoiler: the only person who generates passive income is the influencer flogging all affiliate marketing). Do you think this sounds more like gambling than investing? Brother, you will be poor forever if you don't change this toxic mindset!

Social media platforms are increasingly where people go to learn about money—even though much of what they “learn” will likely end in disaster. But should conventional finance see this as a threat or an opportunity?

This week the UK took steps to change the financial advice landscape for the better. The Financial Conduct Authority has proposed new measures to better monitor online advertising of risky investments.

“Social media and online advertising mean consumers have less time between seeing a promotion and making a financial decision,” says Sarah Pritchard, executive director of markets at the FCA, pointing to the increased potential for harm as price increases cause consumers to panic and make snap decisions.

The regulator has removed or changed more than 5,000 inappropriate financial promotions from FCA-approved firms this year - around 10 times the number it removed in 2021. Greater vetting powers will allow it to target unregulated firms and influencers whose promotions are more likely to “gamify” investments without clearly labeling the risks.

Great – but that still leaves the huge crypto problem (currently outside the FCA's remit) and a rising tide of fraud, although the much-delayed Online Security Bill will force the platforms themselves to do more.

A big reason consumers rely on social media is the lack of affordable financial advice elsewhere. Only 8 per cent of adults in the UK have sought regulated advice in the past year. The estimated “advice gap” includes 13.2 million Brits with more than £840 billion in investable assets. Significant sums, but not big enough for many consulting firms.

This week MPs proposed an amendment to the Financial Services and Markets Act that would enshrine a new category of advice - personalized financial advice.

While fraud and high-risk investments can cause financial harm, you should not do thisenoughRisk is also a problem – keeping too much money in cash or not investing enough to retire. Just as auto-enrolment has successfully helped millions save for pensions, investment platforms could help customers make better decisions by combining platform data with insights from Open Banking, where customers can share their financial data with FCA-approved entries and the upcoming pension dashboard.

“The platforms can see who has cash and who is under-diversified,” says Holly Mackay, founder of consumer website Boring Money. “There is a huge appetite across the industry to do more, but from a regulatory perspective this is a gray area and companies are erring on the side of caution.”

But unregulated finfluencers are waiting on the other side. Personalized advice would help clients focus at a much earlier age while there is still time to change results. Model portfolios could show them how to better diversify their investments. Their investment and spending data could be used to forecast what type of retirement income could be generated from their existing pot and how this compares to their day-to-day spending.

But there are limitations. Counseling is not “advice” – it requires individuals to make decisions of their own volition. If clients decide to invest more money or switch to paying for regulated advice, this will be a win for the platforms. But as Mackay puts it, “Would regulators prefer people to be completely wrong or approximately right?”

One area where I would like to see this push is the threat of high investment costs. The most expensive UK tracker fund is 21 times more expensive than the cheapest, according to a study by investment platform AJ Bell.

Platforms can see which of their investors are holding the worst value options, so why not guide them to a cheaper alternative? The same goes for “closet trackers” – active funds with expensive management fees that eat into retirement savings but do no better than a cheaper passive fund.

Being financially resilient, building up your investments slowly, and retiring more comfortably at age 70 may not be memorable, but these are the messages that should have a far greater impact.

Claer Barrett is the FT's consumer editor and author of What They Don't Teach You About Money.claer.barrett@ft.com; Twitter and Instagram:@Clearb