How safe is it to accept finfluencers' investment recommendations?

If you wish to stay safe, stick to the minority that has a Sebi-registered investment adviser or research analyst licence

Only 6.3 per cent of the 48 financial influencers, or finfluencers, studied were registered with the Securities and Exchange Board of India (Sebi), although 33.3 per cent provided explicit stock recommendations, according to the Clicks and Credibility 2.0 report by the CFA Institute’s Research and Policy Centre. Finfluencers can simplify financial concepts and widen access to information, but investors must understand the risks and regulatory gaps before acting on their content.

 

Why do investors follow them?

 

Gaps in financial knowledge often push investors towards finfluencer content. “Low financial literacy creates eagerness to learn but can also lead investors to act quickly without complete understanding,” says Vishal Dhawan, chief executive officer and founder, Plan Ahead Wealth Advisors.

 

Younger investors often prefer information that is fast, accessible and digital-first. The growth of do-it-yourself (DIY) investing through online platforms after Covid has also increased interest in finfluencer content.

 

Easy-to-follow social-media posts add to their appeal. Finfluencers use easy language, limited jargon, crisp content, and graphic overlays to offer simplified summaries of rule changes, topical news and fund reviews. “Their engaging content tends to attract investors,” says M. Pattabiraman, associate professor, IIT Madras, and founder, Freefincal. He adds that viewers may not, however, always recognise when such content oversimplifies a subject.

 

The perceived complexity and cost of professional financial advice also drive investors towards online creators. “Traditional financial advice is not easily accessible. Some investors may also avoid traditional financial advice because it could highlight their errors of omission or commission,” says Dhawan.

 

Content can educate

 

Finfluencers’ content can provide useful financial information, improve financial education and promote financial inclusion. The CFA Institute report points out that it can democratise access to financial knowledge and bring new and younger investors into the investment ecosystem.

 

“Such content can make concepts such as saving, investing, tax planning and budgeting easier to access. Gen Z and millennials listen to such content and become more financially aware,” says Dhawan.

 

Beware the downsides

 

Low barriers to becoming a content creator increase the chances of investors being exposed to potential bad actors and questionable advice. Only a small proportion of finfluencers are Sebi-registered investment advisers. “Advice from unregistered sources carries no accountability. Moreover, generic content is not customised to an investor’s circumstances,” says Dhawan.

 

Finfluencers may not adequately highlight fees and expenses, tax implications or lock-in periods. Short-form content may promote derivatives, leveraged products or cryptoassets without adequately explaining their risks or suitability. “Content on futures and options (F&O) and trading can be highly risky when it is not labelled as such,” says Dhawan.

 

After gaining popularity, some finfluencers move their activities to workshops, paid seminars, webinars or private messaging groups. Such activities become difficult for the regulator to monitor.

 

Many finfluencers may lure investors with promises of guaranteed, risk-free or unrealistic returns. Such misrepresentation can expose investors to financial loss and fraud.

 

As always, follow the money!

 

When investors blindly follow a finfluencer’s content, they may often not be aware of whether it is sponsored or what financial affiliations exist. Many finfluencers earn through commercial sponsorships, brand relationships, affiliate marketing, or related businesses. “Dedicated agencies exist that connect finfluencers with brands and product manufacturers,” says Pattabiraman.

 

The prospect of payment can encourage an influencer to give a positive review of a financial product. “Monetary and non-monetary support from product providers may lead creators to brush aside the risks of high-risk instruments and strategies,” says Dhawan.

 

Many creators do not disclose their commercial linkages clearly and promote products without stating that the content is paid for. Such linkages lead to biases in recommendations and conflicts of interest that viewers are not aware of.

 

What safeguards does Sebi have in place?

 

Sebi regulates finfluencers according to their activities rather than as a separate legal category. It does not restrict general financial education, wherein no advice or recommendations are offered.

 

According to Sebi rules, anyone providing regulated investment advice or research recommendations must obtain the appropriate Sebi registration, according to the CFA Institute report. The regulator can take legal action against those giving unregistered stock tips or educational content. Enforcement can include fines, bans from the capital markets and disgorgement of illegal gains.

 

Sebi also does not permit registered intermediaries to associate with or sponsor unregistered finfluencers who provide buy and sell tips or entry and exit recommendations.

 

It has also imposed restrictions on unregistered educators using real-time market data, so that they are unable to offer trading tips in the guise of education. Stock-price data used in sponsored educational material must be at least three months old.

 

Regulated entities must display their registered name and Sebi registration details on social-media profiles and content.

 

While Sebi does try to curb the activities of bad actors, its enforcement struggles to keep pace with the volume, speed and monetisation models of digital content, according to the CFA Institute report. The current system is also reactive: it detects and removes problematic content only after it has appeared.

 

Private Telegram channels, offline channels, workshops, webinars and closed messaging groups manage to evade supervision as they are not easily visible.

 

Check before acting on finfluencer advice

 

Before accepting advice or attending a seminar, workshop, webinar or closed messaging group, ask whether the finfluencer is registered with Sebi as an investment adviser or research analyst. Ask for the finfluencer’s registered name and registration number. “Verify registration claims independently on Sebi’s portal,” says Dhawan.

 

The CFA Institute report warns that some players may claim to be “Sebi-compliant”, but this should not be treated as being equivalent to “Sebi-registered”.

 

Check whether the finfluencer is subject to record-keeping, suitability, supervisory and compliance requirements. Ask about relevant qualifications, certifications and experience across market cycles.

 

Find out whether the content is sponsored or part of a paid collaboration, and whether it contains affiliate links or referral arrangements. Treat unusually positive coverage of a product with caution.

 

Demand information on fees and other costs, risks, tax implications and lock-in periods. Do not overlook the risks and costs of derivatives, leverage, cryptoassets or other speculative products.

 

Pattabiraman urges people to adopt the “viewer beware” mantra. Do not rely excessively on a finfluencer’s content. Gather information from multiple sources before acting. “Dig deeper instead of accepting easy answers,” says Pattabiraman.

 

Investors should also assess whether the content is relevant to their specific situation.

 

Be wary of claims of guaranteed, exaggerated or risk-free returns and maintain realistic expectations.

 

Do not make the mistake of assuming that advice given in a private group or workshop has regulatory oversight. Pattabiraman warns that a low-cost workshop or product could be a conduit to upsell more expensive products to investors.

 

Distinguish financial education from promotion and actionable investment advice. To be safe, stick to Sebi-registered investment advisers and regulated platforms offering a grievance-redress mechanism. Finally, do not assume that a finfluencer with a large following is either competent or has regulatory approval to offer advice and recommendations.

 

Actionable tips for investors

• Verify the finfluencer’s Sebi registration independently on Sebi’s portal
• Do not treat claims of being “Sebi-compliant” as equivalent to being “Sebi-registered”
• Check the finfluencer’s qualifications, certifications, experience across market cycles
• Find out whether the content is sponsored or contains affiliate links or referral arrangements; treat unusually positive product coverage with caution
• Demand clear information on fees, costs, risks, tax implications and lock-in periods
• Be specially wary of recommendations on risky products like derivatives, cryptoassets and other speculative investments
• Cross-check claims through multiple sources
• Do not accept claims of high guaranteed or risk-free returns
• Do not assume private groups or workshops have regulatory approval
• Stick to Sebi-registered investment advisers and regulated platforms with grievance-redress mechanisms