Personal finance gurus like Dave Ramsey, Suze Orman, and Robert Kiyosaki have sold millions of books and cultivated massive followings by promising readers financial salvation if they follow their advice. Meanwhile, YouTube and TikTok are jam-packed with charismatic “finfluencers” doling out stock tips, get-rich-quick schemes, and other financial advice to their impressionable fans. 

But how sound is the guidance offered by these financial influencers compared to the rigorous recommendations of academics and economists who have studied personal finance topics for decades?

According to James Choi, a finance professor at Yale University, there is often a wide divergence between the counsel provided by finfluencers versus the advice given by scholars and experts grounded in economic theory and mathematical modeling. 

After thoroughly analyzing the content from 50 of the most popular personal finance books, Choi concluded that there were many more differences than similarities when it came to the financial guidance given on critical topics like saving, investing, debt management, and more.

The Allure and Influence of Finfluencers

The term “finfluencer” refers to an individual who leverages their popularity, fame, or social media status to exert outsize influence over the financial decisions of their followers. 

Finfluencers run the gamut from mega celebrities like Kim Kardashian who attract attention simply by virtue of their star power, to business personalities like Elon Musk or Ryan Cohen who have cultivated fandoms based on their corporate exploits, all the way down to ordinary investors and traders who have managed to grow massive followings on platforms like YouTube, TikTok, Instagram and Twitter.

While their backgrounds and levels of fame may vary wildly, what unites finfluencers is the fact that their audience predominantly consists of regular retail investors. Finfluencers promise to “democratize” finance and investing, claiming they can level the playing field by making insider information, ideas and opportunities more accessible to the masses.

The phenomenon of finfluencing is hardly new. For decades, popular media figures like Jim Cramer have succeeded in building entire brands around doling out investment advice and stock picking tips to their fans without running afoul of regulators. 

However, the rise of social media has allowed newly minted finfluencers to gain reach that was previously only possible through traditional outlets like newspapers, magazines, TV, and radio. This has raised fresh concerns around the potential for manipulation, lack of accountability, and propagation of financially fraudulent schemes.

While finfluencing itself is not illegal, the practice can quickly cross ethical and legal lines if finfluencers fail to disclose paid promotions, provide misleading information, or encourage illegal activity like pump and dump stock manipulations or Ponzi schemes. 

The Securities and Exchange Commission (SEC) and other regulators pay close attention to the activities of finfluencers who are acting as unregistered investment advisors or broker-dealers.

The Disconnect Between Academic Economists and Popular Finfluencers 

According to Choi, finfluencers tend to favor offering simple, intuitive financial tips and money hacks that provide clear action steps for their audience to implement. This practical guidance frequently resonates much more with readers than complex mathematical papers filled with economic jargon.

However, Choi found that these rules of thumb promoted by the leading finfluencers often deviate substantially from the financial advice given by academic economists and scholars who have arrived at their recommendations through rigorous quantitative analysis and modeling.

Below are some examples of the discrepancies Choi uncovered between the counsel of popular finfluencers versus academic experts on various aspects of personal finance:

Saving and Spending Habits

Finfluencers: Many leading finfluencers like Dave Ramsey promote choosing a set savings rate such as 10-15% of your income and sticking to that percentage no matter your age or stage of life. The recommendation is to save the same fixed percent of your earnings when you’re young, middle-aged, and even after retirement.

Academics: Most academic economists advise adjusting your optimal savings rate over your lifespan to smooth out consumption. They recommend saving very little when young, increasing savings substantially during your peak earning years, and drawing down savings again in retirement. This consumption smoothing approach aligns spending levels with income patterns over one’s lifetime.

Attitudes Towards Debt

Finfluencers: Dave Ramsey, the most influential debt reduction guru, strongly endorses his “debt snowball” method for getting out of debt. This approach recommends paying off debts in order from smallest balance to largest, regardless of interest rate, for psychological motivation as quick small wins provide “momentum.

Academics: According to economic theory, the optimal mathematical strategy is to always prioritize paying down the debt with the highest interest rate first in order to minimize total interest paid over time. Academic experts argue Ramsey’s emotional approach will cost borrowers more in interest.

Investing and Asset Allocation

Finfluencers: Many social media investing gurus argue that stocks inherently become safer and less volatile the longer you hold them. This leads to recommendations that young investors maintain close to 100% stocks with no bonds or cash.

Academics: Economists explain that stocks do not actually lose their riskiness over longer holding periods. According to financial theory, one’s optimal equity allocation depends on a variety of factors including human capital, risk aversion levels, and time horizon.

International Diversification

Finfluencers: Personal finance celebrities often cite reasons like currency risk or belief in US economic superiority for justifying why they underweight international stocks substantially compared to US stocks in their model portfolios. 

Academics: Scholars note that expected returns depend on risk premiums, not subjective or patriotic biases. The academic consensus strongly supports diversifying close to global market cap weights based on historical performance data.

Why Such Discrepancy Exists Between the Two Groups

Choi argues that popular finfluencers have good reason to favor offering simple, actionable financial guidance over theoretically perfect but highly complex advice. 

Finfluencer tips resonate strongly because they provide clear steps the average person can reasonably implement. Their advice also accounts for the real-world limitations and behavioral tendencies that most people exhibit around topics like lack of self-control, difficulties delaying gratification, and staying motivated.

In contrast, academics seek to mathematically optimize financial decisions to squeeze out every bit of theoretical efficiency. Their models account for the mathematical nuances but often fail to address how difficult most find adhering to optimal plans over decades due to entrenched behavioral biases.

Furthermore, finfluencers have greater incentive to appeal to the emotions of their audience in order to build engagement and loyalty. Academic economists take more of a detached, analytical approach based solely on the numbers rather than psychological motivations.

Choi concludes that truly sound financial guidance requires judiciously blending mathematical optimization, behavioral psychology, and practical simplicity. 

Neither academics nor finfluencers necessarily have perfect wisdom when it comes to navigating personal finance decisions. But by learning from both groups, individuals are more likely to arrive at financial strategies optimized for their unique situation and temperament.

The Risks of Following “Magical Thinking” Finfluencers 

While many leading financial influencers offer reasonable if basic money tips, others promote truly dangerous ideas ranging from get-rich-quick schemes to mystical philosophies.

For example, an emerging group of modern finfluencers are self-professed witches who claim to be able to predict market moves through astrology readings, tarot card drawings, and other occult practices. They argue you too can make smarter investments if you learn to “think magically. 

This type of supernatural financial advice understandably holds great appeal for some investors. Believing an oracle can peek into the future certainly seems an easier path to wealth than old-fashioned analysis and research.  

But in reality, no witch, psychic, spiritual guru or other finfluencer can actually divine the future direction of asset prices that are influenced by millions of market participants. While magic may entertain and intrigue, it does not lead to investment success over the long run. Those taken in by mystical finfluencing promises will likely end up disappointed and poorer.

Red Flags to Watch Out For With Potentially Shady Finfluencers

The world of finfluencing contains a whole spectrum between gurus with good intentions who offer mildly useful tips on one end and scammers running elaborate cons on the other end.

So how can average folks distinguish trustworthy finfluencers dispensing sound, if basic, money advice from potential grifters and scammers who are out to separate you from your hard-earned savings?

Here are some red flags to watch out for when evaluating a new finfluencer:

Overly Simplistic Claims: “Follow this one weird trick to get rich quick!” Complex problems rarely have simple solutions. If it seems too good to be true, it almost always is.

Guaranteed Returns: No legitimate financial advisor can promise specific investment gains. Markets are complex and unpredictable. Genuine advisors discuss risk management.

Lack of Credentials: Many shady finfluencers totally lack finance or investing backgrounds. They gain clout solely through social media fame and engagement rather than actual expertise.

Sales Orientation: Be skeptical of finfluencers constantly pitching paid courses, “exclusive” communities, or expensive merchandise. Are they focused on helping you or generating sales?

Aggressive Tactics: Finfluencers using ALL CAPS, exclamation points, hype, FOMO, and other high-pressure sales tactics to get you to buy are waving more red flags than a marching band.

A Look at Some Recent Finfluencer Scandals

Unfortunately, finfluencing scandals and sketchy behavior have surfaced repeatedly throughout history right up to today:

– In the 1920s lead up to the Great Depression, astrologer Evangeline Adams amassed extensive influence by providing stock tips based on star charts to over 100,000 newsletter subscribers.

– In 2000, the SEC settled a stock manipulation case involving Jonathan Lebed, a 15-year-old who had hyped obscure microcap stocks using outdated message boards. This highlighted issues around defining illegal manipulation versus free speech.

– In 2022, Kim Kardashian agreed to pay $1.26 million to settle SEC charges that she broke securities laws by illegally touting crypto token EthereumMax without disclosing she was paid for the promotion.

The latest finfluencing controversy surrounds the catastrophic implosion of FTX, formerly one of the largest crypto exchanges. FTX and its founder Sam Bankman-Fried spent exorbitant sums sponsoring various finfluencers and celebrities to hype FTX’s brand. 

When FTX collapsed amid allegations of massive fraud and mismanagement, both the funded finfluencers and regular investors who bought into the hype ended up suffering heavy losses. On the flip side, even superstar finfluencers like Taylor Swift came out looking wise for balking at a massive proposed FTX sponsorship deal after asking tough questions.

Key Takeaways on Finfluencers for Regular Investors

Given the frequent disconnect between finfluencer rhetoric and financial realities, what lessons can everyday investors take away to protect their wealth?

– Maintain healthy skepticism of advice from finfluencers, however confidently stated. Do your own homework rather than blindly following tips.

– Prioritize math and analytics over emotion for making optimal financial moves, although psychology should be considered.

– Seek out professional guidance tailored to your specific situation over one-size-fits-all finfluencer rules.

– Diversify your advice sources by blending input from finfluencers, academics, and trusted financial advisors.

Most finfluencers have some redeeming qualities, whether boosting interest in money topics or providing basic money hacks. However, wholly relying on finfluencer guidance often misleads followers down wayward paths. Curating a diverse team of advisors can help benefit from their strengths while minimizing glaring weaknesses.

In the world of personal finance, many roads can lead to Rome. But blindly trailing a finfluencer without verifying their advice is likely to end in disappointment. With open but critical eyes, investors can filter finfluencer tips to extract the occasional wisdom while discarding the hype.