Misinformation and lack of trust in traditional institutions runs rampant in our society.
The regulated financial sector is no different, particularly among young people. Roughly 38% of Gen Zers get financial information from YouTube, and 33% from TikTok, according to a recent Schwab survey.
As a former regulator and author of kids’ books about money, I am truly horrified by the toxic advice they are getting from these unqualified “finfluencers” — advice which, if followed, could cause lasting damage to their financial futures.
Most troubling are finfluencers who encourage young people to borrow. A central theme is that “chumps” earn money by working hard and that rich people make money with debt. They supposedly get rich by borrowing large sums and investing the cash in assets they expect to increase in value or produce income which can cover their loans and also net a tidy profit.
Of course, the finfluencers can be a little vague about how the average person can find these wondrous investments that will pay off their debt for them. Volatile, risky investments — tech stocks, crypto, precious metals, commercial real estate — are commonly mentioned.
‘The road to quick ruin’ for inexperienced investors
Contrary to their assertions, these finfluencers are not peddling anything new or revelatory. It’s simply borrowing to speculate.
For centuries, that strategy has been pursued by inexperienced investors as the path to quick riches, when in reality, it’s the road to quick ruin. There is always “smart money” on the other side of their transactions, ready to take advantage of them. For young people just starting out, with limited incomes and tight budgets, it’s the last thing they should be doing with their precious cash.
Debt glorification is not the only bad advice being peddled on the internet.
You can find finfluencers advising against diversified, low fee stock funds in favor of active trading (without disclosing research consistently showing active trading’s inferior returns). Or ones that discourage individual retirement accounts and 401(k) plans as savings vehicles in favor of real estate or business startups (without mentioning lost tax benefits as well as the heavy costs and expertise needed to manage real estate or high failure rates among young companies).
Some encourage making minimum payments on credit cards to free up money for speculative investments (without mentioning the hefty interest costs of carrying credit card balances which compound daily).
Why are so many young people turning to these unqualified social media personalities for help in managing their money instead of regulated and trained finance professionals?
One reason: the finfluencers make their advice entertaining. It may be wrong, but it’s short and punchy. Materials provided by regulated financial service providers can sometimes be dry and technical.
Where to get trustworthy money advice
Xavier Lorenzo | Moment | Getty Images
They may be boring, but regulated institutions are still the best resource for young people to get basic, free information.
FDIC-insured banks can explain to them how to open checking and savings accounts and avoid unnecessary fees. Any major brokerage firm can walk through how to set up a retirement saving account. It’s part of their function to explain their products and services, and they have regulators overseeing how they do it.
In addition, regulators themselves offer educational resources directly to the public. For young adults, one of the most widely used is Money Smart, offered by the Federal Deposit Insurance Corporation — an agency I once proudly chaired.
There are also many excellent regulated and certified financial planners. However, most young people will not have the budget to pay for financial advice.
They don’t have to if they just keep it simple: set a budget, stick to it, save regularly, and start investing for retirement early in a low-fee, well-diversified stock index fund. They should minimize their use of financial products and services. The more accounts and credit cards they use, the harder it will be to keep track of their money.
Above all, they should ignore unqualified “finfluencers.”
Check their credentials. Question their motives. Most are probably trying to build ad revenue or sell financial products. In the case of celebrities, find out who’s paying them (because most likely, someone is).
Regulated finance needs to reclaim its status as a more trustworthy source for advice. The best way to do that is, well, provide good advice. Every time a young adult is burnt by surprise bank fees, seduced into over borrowing by a misleading credit card offer, or told to put their retirement savings into a high fee, underperforming fund, they lose trust.
I know regulation and oversight are out of favor these days. But we need a way to keep out the bad actors, and practices to protect young people new to the financial world. It’s important to their financial futures and the future of the industry as well.
Sheila Bair is former Chair of the FDIC, author of the Money Tales book series, and the upcoming “How Not to Lose $1 Million” for teens. She is a member of CNBC’s Global Financial Wellness Advisory Board.