Social media is becoming an increasingly used source of financial advice. Young investors, in particular, are turning to TikTok, YouTube or social trading platforms for financial advice, where short and engaging videos about investing are easy to find. While far from all financial advice on social media is bad, research has illustrated that financial advice on social media tends to propagate active trading, return chasing and financial mistakes, not to mention the possibility of scams and fraud. These findings raise important concerns over the quality of financial advice and paints a relatively bleak picture of the ability of investors to share good advice within their social circles.
An important question is how far we can extend the results from social media platforms. We who work in finance are often asked by our friends and family members what to invest in. When asked, we usually recommend the textbook passive investment: buy a low-fee, diversified mutual fund and try to forget you have it. It is not difficult to imagine that individuals would seek advice from social connections with expertise in finance getting similar advice.
Differences between personal financial advice and social media advice
In a new paper, we use real-world investment decisions and survey data from German retail investors to document novel facts about personal financial advice, or advice to family and friends. We focus on financial advice to close personal connections. We look at both individuals who make recommendations (Recommenders) and individuals who look for financial advice (Followers).
While many investors may use social media, it is not the most important source of financial advice for most. We show that 72 percent of Followers list family members as the most important source of financial advice, and 57 percent list friends, neighbors, or coworkers. By comparison, only four percent of Followers list anonymous online advice as the most important source of financial advice.
A key difference between advice from friends and family and from social media is their motivation. Asking investors in a survey what they look for in the person providing advice, we find that Followers seek trust, knowledge, experience and expertise in the advisor. Only a few were mentioning financial returns. In both the survey and bank data, Recommenders appear to match these criteria and are positively selected based on experience, income, and portfolio quality. Personal financial advice to family and friends is likely motivated by a desire to see friends do well or simply to avoid the potential repercussions of a bad stock tip.
One survey respondent stated “I do not give any advice regarding investments in securities as this is a very sensitive topic. After all, losses can occur and then you will be held partly responsible for them.” Incentives for posting on social media platforms may include the desire to generate interaction and attract followers, which may necessitate a more active trading strategy. The personal relationship changes the nature of advice and forces the Recommender to internalize the outcomes of the Follower. Relationships on social trading platforms are typically weaker because they involve anonymous or pseudonymous followers.
Benefits of financial advice in personal settings
Our results paint a relatively positive picture of personal financial advice. We find that Recommenders provide different advice from what has been found so far in the previous literature. In both survey and bank data, Recommenders are more likely to recommend funds than single stocks. While social media tends to promote assets that have experienced higher returns, such as stocks with high volatility and skewness, the advice to family and friends is much more conservative. Followers are more likely to follow advice on funds than on individual stocks with high past returns. In a brokerage data set on real investment decisions, we find that financial returns are not correlated with accepting financial advice.
While our findings do not invalidate the role of returns in other settings, the results suggest that at least a part of the population employs a more deliberative process for accepting financial advice in personal settings.
Advice on social media is easily accessible but shows a lack of quality
Our results speak towards a broader problem: Financial advice on social media is easily accessible to everyone regardless of their background, but one might reasonably be concerned about the quality of the advice. Several recent media articles have noted that young households use social media for investment advice. Far from all the advice provided on social media is bad, but many social media accounts promote risky strategies such as get-rich-quick schemes, crypto investments, or day trading.
The kind of advice we document is less easily accessible, since it requires access to experts, but is instead of high quality. With homophily and sorting in social networks (Balakina et al., 2024), not everyone will have access to high-quality advice and may instead be pushed towards the advice provided on TikTok or Instagram.
To fully understand the landscape of financial advice provided by social networks, we need to better understand who has access to good advice, how advice affects portfolio composition, and who is left to the vagaries of social media.
Olga Balakina is Postdoctoral Researcher in the Department of Household Finance at SAFE.
