January 27, 2023

Do you want to be financially free, build your wealth and retire at 30? Judging by the growing number of people viewing and “liking” this type of video content on TikTok and Instagram, the cost of living crisis has increased the supply of those looking for a quick fix to their finances.

Follow some “finfluencers” and you’ll invariably discover that the path to wealth is borrowing money and investing in risky assets, or paying for a course to teach you trade secrets (spoiler: the only person who generates passive income , the influencer is whipping all affiliate marketing). Do you think this is more like gambling than investing? Brother, you will be poor forever if you don’t change that toxic mentality!

Social media platforms are increasingly where people educate themselves about money – even if much of what they “learn” is likely to end in disaster. But should conventional finance see this as a threat or an opportunity?

This week, the UK took steps to change the financial advisory landscape for the better. The Financial Conduct Authority has proposed new measures to better control the online promotion of risky investments.

“Social media and online advertising are helping consumers take less time between seeing a promotion and making a financial decision,” said Sarah Pritchard, executive director of the FCA, noting that the likelihood of harm increases as the price rises, causing consumers to panic and make hasty decisions. .

The regulator has removed or amended more than 5,000 inappropriate financial promotions from FCA-authorized companies this year — about 10 times the number in 2021. Greater screening powers allow it to “gamify” the unregulated companies and influencers whose promotions invest without the risks clearly marked.

Great – but this still leaves crypto’s huge problem (currently out of the FCA’s purview) and a rising tide of scams, though the much-delayed online safety law will force the platforms themselves to do more.

A major reason consumers rely on social media is the lack of affordable financial advice elsewhere. Only 8 per cent of UK adults have taken regulated advice in the past year. The estimated “advisory gap” includes 13.2 million Britons with more than £840 billion in investable assets. Significant amounts, but not big enough for many consultancies to deal with.

This week, MPs proposed an amendment to the Financial Services and Markets Act that would enshrine a new category of advice: personalized financial guidance.

Although scams and risky investments can cause financial loss, don’t take it enough risk is also a problem – holding too much cash or not investing enough to retire. Just as auto-enrollment has successfully driven millions into retirement savings, investment platforms can help clients make better decisions by combining platform data with insights gained through Open Banking, where clients can choose to share their financial data with FCA-approved bookings, and the Upcoming Retirements Dashboard.

“The platforms can see who has cash and who isn’t diversified enough,” said Holly Mackay, founder of consumer website Boring Money. “There’s a huge appetite across the industry to do more, but it’s a gray area from a regulatory point of view and companies opting for safety.”

But on the other side, unregulated finfluencers await. Personalized guidance would help clients focus at a much younger age, while still allowing time for the results to change. Model portfolios can show them how to better diversify their investments. Their investment and spending data could be used to project what kind of retirement income could be generated from their existing pot and how it compares to their day-to-day expenses.

But there are limitations. Guidance is not “advice” – it requires individuals to make decisions of their own accord. And if clients choose to invest more money or upgrade to paying for regulated advice, it’s a winner for the platforms. But as Mackay puts it, “Would regulators prefer people to be dead wrong, or about right?”

One area where I’d like to see these pushes applied is the threat of high capital costs. The most expensive UK tracker fund is 21 times more expensive than the cheapest, according to research from investment platform AJ Bell.

Platforms can see which of their investors have the worst value options, so why not direct them to a cheaper alternative? The same goes for “closet trackers” – active funds with expensive management fees that deplete retirement savings but don’t outperform a cheaper passive fund.

Being financially resilient, building your investments slowly, and retiring more comfortably by age 70 may not be meme-worthy, but these are the messages that should have much more impact.

Claer Barrett is the FT’s consumer editor and the author of “What They Don’t Teach You About Money”. claer.barrett@ft.com; Twitter and Instagram: @Claerb

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