What do Reddit, TikTok, and Robinhood have in common? They are all contributing to a huge problem plaguing young, vulnerable, and inexperienced investors. These all too easily accessible platforms are being used to glamorize (1) the very risky practice of gambling on market volatility and (2) trading on margin—two habits that set young “investors” up for potential financial disaster before their financial lives have scarcely begun.
The Surge of Pop Finance
A very interesting thing is happening right now in the finance world. Financial influencers—from those with actual credentials to those who can’t even spell the word finance—are leveraging social media to answer popular finance questions in order to gain a following in the digital sphere. The greater the following, the fatter the paycheck they can earn through avenues such as brand promotion, sponsorships, and representation deals from large companies.
In fact, TikTok even started a $200 million creator fund last July to give users incentive to use the platform for such reasons as these. Users over 18 can now apply to earn income when they have 10,000 followers, 10,000 video views in 30 days, and consistently post original content within TikTok’s guidelines. Combine the pandemic-fueled interest in finance with these social media incentives and you’ve got a full-blown business model.
But the problem here is that young investors could be getting their financial advice from former Merrill Lynch financial adviser turned social media influencer, Humphrey Yang or, well…. some guy sitting in his living room in his sweatpants with little more than a high school diploma. How do they choose who to follow? According to Yang, the idea of building the social media platform is to gain people’s attention and teach them something worthwhile, but it’s got to be either “very sexy, very cool, or very funny—that’s all anybody wants.” So, there you have it. Whoever makes the coolest, sexiest, or funniest videos on social media could currently be shaping your adult child’s future.
The Peril of Buying on Margin
While spreading financial advice to the younger generations may sound like a good idea on the surface, the wrong types of messages seem to be the ones gaining the most traction. What’s more is that the younger generations don’t have much to invest. The solution offered to them? Use someone else’s money. In other words, buy equities on margin. You, too, can run with the big dogs for as little as $5 a month, a strategy Robinhood markets as “Paying for Robinhood Gold.” The website explains, “Your account will be charged the $5 monthly fee every 30 days at the beginning of each billing cycle. If you use more than $1,000 of margin, you’ll pay 2.5% yearly interest on the settled margin amount you use above $1,000. Your interest is calculated daily and charged to your account at the end of each billing cycle.”
The company even likens this type of investing to the thrill of buying a motorcycle—something very sexy and very cool to younger audiences. There is a sense of autonomy and freedom that is being advertised here that is causing a surge in buying on margin. But the reality is that these messages are only putting the younger generations in financial peril. In fact, CBS MoneyWatch found that investors who borrowed from Robinhood were 14 times more likely to default on their loans than if they borrowed from other brokerage firms like eTrade or TD Ameritrade.
So not only are our youth getting frivolous advice from social media sites, they are being encouraged to act on it by trading commission-free using margin. Sadly, such inexperience and ignorance in finance have had deadly consequences. Last year a young man took his own life because a computer glitch showed he had a six-figure loss on equities he had traded on margin. How many others could suffer this same fate if the market crashes tomorrow?
Our Parental and Fiduciary Duties
Young adults are enamored with alluring and reckless financial advice from social media at a younger and younger age. While regulations may be on the horizon, we truly believe it is our duty to act now. It is our job, as parents, grandparents, and fiduciary financial professionals to help protect the younger and more vulnerable generations from the potential dangers here. As your fiduciary advisors, we encourage you to pass the following information on to your children, any young adult you know, or any individual that you know who may be participating in online trading. If there is anything we can do, it is to combat pop finance with more of the time-tested financial advice we have come to trust and use to build beautiful lives for ourselves and our families.