In the decades since the introduction of MySpace and the subsequent rise of Facebook and Instagram, social media has become inescapably entrenched in the daily lives of Canadians. The multiple lockdowns implemented in response to the COVID-19 pandemic have only amplified this trend. According to the analytics firm App Annie, the average amount of time Canadians spent on their phones increased by a whopping 20 percent in 2020, and we now spend an average of 1.46 hours daily on social media.

Couple the pandemic environment with the exceptional market performance since the March 2020 lows, and it is not surprising that there has also been a big increase in the volume of content related to financial matters on social media. Platforms like Instagram and TikTok are fueling this shift, where concepts like index investing and tax planning are being explained in snackable, light-hearted formats by a new generation of social media influencers. These finance influencers, known as “finfluencers,” are quickly becoming an increasingly popular source of financial information.

Explosion of social media

Turning to the media for investment advice is not a new idea. After all, Bloomberg TV and CNBC garner tens of millions of viewers each month—more than publications like the Wall Street Journal, which reaches just over three million readers.

On TikTok, videos with the hashtags #finance, #investing, and #stocktok have been viewed more than twelve billion times

Yet the scale and pace of the consumption of financial advice on social media is staggering. TikTok videos tagged with the hashtag #stocktok have been watched two billion times, while the more conservative hashtag #personalfinance has received more than 5.3 billion views.

It’s not just TikTok that has gained in popularity, either. Most social media platforms have carved out dedicated communities for sharing content about saving and investing. News aggregating and discussion website Reddit hosts the popular subreddit r/wallstreetbets, which many blame for the GameStop and AMC stock drama and which now boasts 11.6 million members.

While finfluencers provide an engaging way for investors to boost their financial literacy, as with most topics on social media, it doesn’t take long to come across potentially questionable financial advice. Despite the benefits, social media makes it easy for influencers with limited investment knowledge to share their opinions about trading and personal finance. This can have serious implications for the young and inexperienced investors who are the main consumers of this type of content.

Finfluencing investments

The digitized investing environment created by social media provides investors with a more efficient way to access a range of information online, but research shows that they are using that information to make real investment decisions and may be adopting risky investing strategies as a result. Growth in the number of hours spent on top investment and trading mobile apps grew by 115 percent in Canada in 2020. Moreover, a recent survey from investment firm TIAA found that one-third of Americans act on financial advice found on social media, and nearly the same proportion of people listen to advice from influencers and celebrities.

Note: Android phones; among top five apps. Source: App Annie Intelligence

In early 2021, we saw just how influential social media can be in encouraging people to buy or sell particular stocks. The GameStop trading frenzy, in which stock of a video game retailer surged from US$19 to US$347 in less than two weeks, was driven by Redditors and helped along by tweets from Elon Musk, founder of Tesla and SpaceX and an influencer who has a huge follower base but is not certified to give investment advice. The same celebrity has also frequently tweeted about cryptocurrencies, which are typically more volatile than stocks.

Nearly 1.6 million tweets, 82,000 mentions on Reddit, and 1,465 YouTube videos about the video game retailer GameStop were posted between January 20 and January 27, 2021.

Social media management company Sprout Social tracked mentions of GameStop on social media during that time and found that nearly 1.6 million tweets, 82,000 mentions on Reddit, and 1,465 YouTube videos about the video game retailer were posted between January 20 and January 27, 2021.

Additionally, in 2020, the cryptocurrency trading platform Paxful analyzed 1,212 videos from a sample of 50 popular finance-focused TikTok accounts. It rated 14 percent of them as misleading. This included, without disclosures or disclaimers, encouraging users to buy specific assets and implying a given investment would guarantee a profit.

This is particularly a problem for young people. Those aged 18 to 34 are more likely to develop an interest in investment from social media rather than traditional news websites, according to research from investment firm Hargreaves Lansdown.

Regulators are taking notice

The explosion of financial content on social media raises questions about conflicts of interest, misinformation, and outright scams. Those who have worked as “traditional” investment advisors can quickly identify some gaps in this form of advice giving. Where is the risk tolerance analysis and accreditation of investors? Are conflicts of interest and finfluencers’ ownership of certain investments properly disclosed? Could social media content be seen as attempts of “pump and dump”? Who vets the qualifications of these advice givers, polices their behaviours, and enforces disciplinary actions on rule breakers? Has anyone even defined the “rules” for them? All these essential questions in the “traditional” investment industry are circumvented simply because a smartphone connects finfluencers directly to their audiences.

Regulators are starting to notice and say that, when it comes to who should own the responsibility of policing bad financial content, the duty shouldn’t necessarily fall to the host platforms. Instead, the regulators think that regulators and platforms should be working together.

Recently, the British Columbia Securities Commission (BCSC) proposed new rules that would apply to anyone promoting specific investments online. The consequences of flouting the rules, if they came into effect, would include penalties of up to CA$1 million for each contravention. The BCSC would like to see more transparency by anyone telling others on social media they should buy, hold, or sell investment products.

Social networks have also started to respond. In July 2021, TikTok updated its content policy to ban influencers from directly promoting specific financial services and products, such as foreign exchange, cryptocurrencies, and investment services. Google and other internet giants have also come under growing pressure to take action about scam advertisements that appear on their platforms, especially as fraudulent activities have increased during the pandemic.

Helpful or harmful?

Hopefully, these and similar measures will reduce the presence of fraud and recommendations for high-risk investments on social networks, leaving space for more generalized informative and educational content. While a significant benefit of social media is the possibility of fostering overall greater participation in capital markets and creating a new generation of investors, there are certainly some pitfalls. Only by improving the credibility and quality of finance-focused content can we realize the far-reaching benefits of this new forum for finance and investment education.