Since TikTok was launched in September 2016, it has grown exponentially, becoming the go-to platform for young people across the world, providing not just sources of amusement, but also of information and even advice. FinTok has become the leading source of financial news and advice. Here’s why.
Trust in Traditional Financial Advisors and Institutional Investors is Low
Finance has always been a top-down affair, in which financial advisors, and institutional investors act as gatekeepers of information. In the past, if you wanted to invest, you had to find a fund or asset manager you trusted, and they would invest on your behalf. Often, a financial advisor would direct you, and often, that financial advisor would have, or still has, ties to the fund they directed you to, creating conflicts of interest. However, with the rise of social media and zero-commission brokerages, along with sharply declining trading costs, retail investors like you and me, have begun investing on their own. Many of these investors are motivated by the poor performance of traditional funds. For instance, one study found that most hedge funds fail and the typical life of a hedge fund is 5 years. The Great Recession showed that many of the world’s best managers and institutional investors were susceptible to the same errors that they warned retail investors about. With trust low, and access to information greater than ever, people have been willing to set out on their own and develop their own portfolios. The rise of passive investing as opposed to active investing, is another sign of the decline in trust in traditional financial advisors and institutional investors. People just don’t trust financial advisors and institutional investors as much as they did in the past.
Economic Conditions Have Declined
In addition, millenials and Gen-Z face a harsh economic environment, in which traditional avenues to financial freedom have largely closed. It’s no longer enough to get a job, work hard, and save up, to get the American dream. Young people face higher unemployment levels, rising inflation, wages that can’t keep up, and even lower market returns. Consequently, they have to be more active than past generations, about how they manage their finances.
A Third of People Now Get Financial Advice from Social Media
Today, according to a survey from the investment firm TIAA, a third of people seek financial advice from social media platforms such as TikTok, Instagram and Reddit, before making decisions. In Canada, half of Canadians 18 to 34 years old, consult social media to help them make financial decisions. Although social media makes a lot of people think of unskilled influencers pushing untested ideas, there are a lot of real experts on social media, who can at least say they have skin in the game and are trying out their own ideas. Young people who get financial advice from social media are also benefiting from the wisdom of crowds: even though any one person on social media may be wrong, the collective wisdom is rich and typically, better than any single expert. Young people are making their own decisions, such as turning their individual retirement accounts (IRAs) into self-directed IRAs and using gold IRA rollover to invest in gold. Others are investing in cryptocurrency, largely shunned by traditional investors, and nevertheless, the best performing asset of the past decade. Social media has been able to find investment ideas that traditional gatekeepers would never take, and yet those ideas have worked out. For young people who can sort the chaff from the wheat, social media is a gold mine of great advice.