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.
