Will Finfluencers Replace Financial Advisors?

Industry Trends Wealth Management

Last week, the CFA Institute Research & Policy Center released its Finfluencer Appeal: Investing in the Age of Social Media report on the growing impact of finfluencers (short for financial influencers) on young investors, highlighting the challenges and opportunities for the wealth management industry.

The report finds that 37% of Gen-Z investors in the United States cite social media influencers as a major factor in their decision to invest.  This finding probably doesn’t bother financial advisors since most studies find that the average net worth of Gen Z (who are now in the workforce) is negative (after deducting student loan debt), but that might be short-sighted.

Most of this generation is still in their 20s and have a lengthy career of earning income and investing assets ahead of them.  Many Gen Zers also have parents and grandparents with financial advisors, so wealth managers need to understand this client demographic to keep the family relationship beyond the current generation.

Only 20% of finfluencer content that contained investment recommendations included any form of disclosure

The impact that finfluencers have on young investors is concerning since CFAI’s report noted that only 20% of finfluencer content that contained investment recommendations included any form of disclosure (such as the professional status of the finfluencer or whether the finfluencer received commissions or other forms of payment for recommending certain products).  CFAI estimates that 32% of finfluencer content contains investment recommendations, so Gen Z could be relying on biased information to manage their portfolios.

Finfluencers also often recommend individual securities and sometimes even cryptocurrency to their followers.  We’re not as critical of crypto as Charlie Munger but still think it’s a highly inappropriate investment recommendation for investors with minimal assets and net worth.

Since finfluencers usually don’t disclose their conflicts or source of compensation for making investment recommendations and often make unsuitable endorsements to their followers, it’s inconceivable that they would eventually fully replace financial advisors or wealth management firms.  There will always be a need for unbiased, objective investment advice from professional advisors who aren’t conflicted in making asset allocation or security selection decisions for their clients.  These investment professionals are compensated to keep their clients from making wild bets on crypto or individual stocks, not the other way around.

So why are finfluencers so popular with young investors?  CFAI states that finfluencers appeal to Gen-Z investors because they produce educational and engaging content that is free and instantly accessible.  They are also often relatable and, in some cases, perceived to be trustworthy.  CFIA notes that finfluencers may also be filling the gap in access to investment advice by helping synthesize what is perceived to be complex financial information into accessible social media content.  Younger investors are also more prone to have a negative view of Wall Street and major financial institutions, making finfluencers a more viable alternative to them.

It could make sense for some RIAs to partner with finfluencers in marketing efforts to prospective Gen Z

For all these reasons, it could make sense for some RIAs to partner with finfluencers in marketing efforts to prospective Gen-Z clients.  In these situations, CFAI recommends compliance training for finfluencers, reviewing all their content before publication and disclosing how the RIA compensates them.  For wealth managers competing with finfluencers, CFAI notes that the main differentiators of professional advisors are that the information they provide can be tailored and comes with assurances of quality, professional competency, and duty of care.  Advisors should emphasize these elements in their value proposition to stay competitive in an increasingly digitalized market for investment services.

We think finfluencers are more likely to be a marketing opportunity than a competitive threat to financial advisors seeking business from younger investors.  FAs that stress their value proposition and key points of differentiation will usually win the clients they want over their conflicted competitors.  If that fails, they can always partner with one, but we highly recommend they read CFAI’s report before doing so.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of RIAs, asset managers, and trust companies.

Special thanks to Lucas Parris for the idea.