Social media’s impact on investing

The internet and latterly social media have given rise to an explosion of investment information, and it’s far from easy to separate the wheat from the chaff given the avalanche of opinions and recommendations from self-proclaimed investment gurus, “successful” traders and investors, and industry veterans.

Given the accessibility of such information — from those with plausible credentials or otherwise – in combination with a plethora of passive investment options and a long-running bull market, it’s not surprising that we’ve seen a steep rise in DIY investing.

Collectively these factors have led to an explosive growth in no-fee/commission-free discount brokerage accounts.

A report released in December by the British Columbia Securities Commission found that approximately 50% of young adults are managing their money themselves, noting that young adults are less trusting of traditional investment professionals compared to older investors.

They are more likely to turn to social media platforms such as YouTube, TikTok and Instagram for financial information — and to influencers and “experts” dispensing advice with little regard to existing regulatory constraints.

Indeed, influencers are often being paid to promote products and services — a case in point, popular YouTubers “Graham Stephan,” ‘Meet Kevin’ and others are currently on the wrong end of a $1 billion class action lawsuit for their promotion of FTX.

Then there’s ChatGPT. Despite not having access to real-time or near-contemporaneous information — a vital component when assessing a potential investment and making trading decisions — many young people are turning to it for financial advice.

While ChatGPT is supposed to be limited to providing generic advice, it can be “tricked” into generating ideas on investments. Putting this to the test, when asked for it to provide its best idea for an investment this year, it responded: “As an AI language model, I cannot provide specific investment recommendations as I do not have access to your financial situation, investment goals, and risk tolerance. It is important to conduct thorough research and consult with a financial advisor before making any investment decisions. However, some investment ideas to consider this year could include diversified index funds, growth stocks with strong fundamentals, and investments in emerging technologies or industries with high potential for growth.”

Not exactly actionable. But, when asked to provide some ideas on AI ETFs, it responded with a list of five (please note, none of the below should be considered investment advice): Global X Robotics & Artificial Intelligence ETF (BOTZ); iShares Robotics and Artificial Intelligence Multisector ETF (IRBO); First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT); AI Powered Equity ETF (AIEQ); and Horizons Active AI Global Equity ETF (MIND).

While Chat GPT can’t yet provide any meaningful analysis and recommendation, it’s not hard to imagine that in the not-so-distant future, it will have access to real-time data and what it can do with that information could be a game changer. It is already claiming to beat 90% of humans on a range of standardized tests. In fact, part of this blog was written by Chat GPT.

The question for the wealth industry is to what degree will the investing public continue to rely on institutions for their investment needs — and where does that leave the traditional advisor?

Advisors have certainly faced criticism in the past over how they’re paid commission on the products they sell. The prolonged bull market and the strong performance of passive investment vehicles (and the “buy and hold” mentality they foster) have served to erode the perceived value of a wealth manager’s role.

However, given current uncertain times and a high-inflation, high-interest-rate environment, growth looks set to be curtailed and we may very likely be facing stagflation for years to come. The general public has little to no experience with stagflation, and would benefit from both the experience of a good financial professional and actively managed money.

There are early signs that there is a resurgence into active investments as fund flows outpaced passive investments in 2023. With returns from passive investments impacted, wealth managers’ knowledge, experience, and access to reliable market information will look increasingly compelling for investors as they look to navigate turbulent markets.

The rise of fee-based service further helps to remove any conflicts of interest from the client-advisor equation. In addition, risk management will be an increasingly important part of portfolio management, now that active management is in vogue once more.

So how do wealth institutions and money managers help resurrect the investment advisor, particularly in the face of more attractive digital solutions offered by smaller players?

Many do-it-yourselfers have high experiential expectations, having become accustomed to the straight-through processing of slick modern platforms, and the tools, information and opinions at their fingertips.

Institutions should look to review rudimentary or aging digital offerings, with a view to leveraging new technologies, notably AI — chatbots for client service and enhanced AI-assisted investment and trading platforms. Account aggregation with more intelligent financial planning entry points will also offer their clients an enhanced experience while providing the financial professionals who serve them with the tools to win over and service those investors – placing professional investment advice firmly center stage.

Kelvin Cheng is a principal consultant at Capco, a global technology and management consultancy specializing in driving digital transformation in the financial services industry.