Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into account your personal situation, circumstances or needs.

So Mark you just got back from holiday.

Mark Lamonica: I did, I did. And when you saw me when I came back from holiday. You said you look red. That was the first…

Jayamanne: You got a bit of sun.

Lamonica: That was the first thing that you said to me.

Jayamanne: Yeah, you got a little bit of sun. But you also got ill.

Lamonica: I had a bad night. So I had some food poisoning, and I had a bad night and actually I was doing a webinar the next day.

Jayamanne: So Mark very kindly does two webinars a week while he's on holiday.

Lamonica: Yes, but I could not do it because I was laying on the floor of my hotel room and so we cancelled the webinar and then only two people. So it wasn't a lot of people. Two people sent angry emails about it.

Jayamanne: But you also got a very concerned message from your mother, who found out you were ill because she signs up for one of your webinars.

Lamonica: I know, I know, it's a troubling situation. I think what we need to do is go into our email system and opt her out of all communications. Do you think that's a good idea?

Jayamanne: I don't think that's a good idea.

Lamonica: Then she'll just message you because I don't return her messages when she asked me stuff like this, right.

Jayamanne: I'm okay with that.

Lamonica: Okay. Well, let's get started. I'm not – am I still as red.

Jayamanne: No, no, you've calmed down.

Lamonica: I've calmed down. I was not angry. I sat in the sun in Thailand. Anyway. So we've done an episode on finfluencers before. Well, two episodes it is a two-part series. Remember when we used to do those Shani. But now we made a pledge. We're only going to do one and done for everything, and we've done that.

Jayamanne: We haven't, but we'll try. We made a concerted effort.

Lamonica: It's the thought that counts. Well, so in those episodes we discussed the way that the financial advice landscape has changed. And of course it's changed due to multiple reforms and regulatory changes off the back of the Royal Commission into misconduct in the banking and financial services industry.

Jayamanne: And there have been a number of flow on effects, but one of the main flow on effects is that it has made, financial advice less scalable. Which is a good thing in our opinion. It means that the financial advice is being tailored to each individual and their situation. We don't think that a templated approach serves investors' best interests. However, the bad side to this is that financial advice is no longer as accessible as before, and the commission's being removed means that financial advice is expensive and inaccessible for many that seek it out.

Lamonica: Alright, so why don't we spend a second on this, before we get into the episode. So, I think hopefully you've realized this from everything we've talked about on all of our podcasts. Financial decisions are very personal. So we all have unique situations which range from the outcomes we're trying to achieve to a bunch of non-financial factors that will influence the decisions we make including health, family and career considerations. And we all view money and investing differently based on how we are raised and our own life experiences. And we of course all have different levels of financial literacy and different tax situations.

Jayamanne: And financial advice or guidance that is delivered at scale, which generally means delivered through technology platforms, is very good at solving some financial needs. But it is terrible at solving for others where the degree of interaction needs to be more robust and nuanced than answering a couple of questions. But like we've just mentioned, we need to balance the need for scalability to lower cost, with the fact that in some cases comprehensive financial advice is needed.

Lamonica: And then of course cue finfluencers, or financial influencers so they provide personal finance. We won't really call it advice because what they're able to talk about has been restricted by ASIC since those original episodes. But they provide investment information and guidance for free.

Jayamanne: And the issue with finfluencers though is that many are unqualified or are (reverting) financial advice to type and trying to make it as scalable as possible, and one-size-fits-all. And what this means is that many investors that are starting out are following the suggestions, and we'll use that term loosely, great marketers and graphic designers that may have an interest in personal finance but have no experience. And to quote Mark on this, "the teacher is only a few pages ahead of the student".

Lamonica: Are you are you quoting me to me? Okay. I'll take that. So as we referenced before, there are these new rules that ASIC has come out with and they basically cracked down on finfluencers without licenses, providing general advice and said they'll come after any who provide any advice. And so many of these finfluencers have of course, naturally pivoted their offering.

Jayamanne: And the way that they have pivoted their offering is to speak about their personal situation and circumstances. Or just providing factual information and data such as company news and announcements. They've also created forums where the advice can be provided by complete strangers who once again know nothing about your personal circumstances. For some questions, this is a great supportive community that can provide encouragement in the long slog of achieving your goals, but in some cases people are asking for and receiving advice that cannot possibly be given without knowing about the particulars of somebody's situation.

Lamonica: And this is what we want to focus on, sharing personal situations. We want to focus on the way that these personal situations are shared, even if they have the best of intentions. The point of sharing personal situations is presumably to give advice, but to do so within the confines of the current regulatory environment.

Jayamanne: And this transparency is helping people. There's a lot to say about the barriers that are being broken down by speaking about pay, budgeting, navigating relationships, the ugly side of money, previously taboo topics, where the discussion and transparency wasn't there, and many were just navigating this without any guidance, and they do say sunlight is best disinfectant.

Lamonica: However, a lot of these situations don't offer true transparency. Offering these personal situations within the confines of regulations has led to a lot of the picture being missed. For example, someone may post their net worth and their assets, which has become very common, but there's no explanation of any of the planning or decision making behind choosing those assets, or why they are right for that particular person.

Jayamanne: And the problem with this is that it is human nature to compete and compare, we compare with friends, family, neighbors. The issue with comparison is that especially without context, it's difficult to understand how people have reached the outcome they have and brings about feelings of inadequacy, and sometimes irrationality. Irrationality that can undermine investment decisions and outcomes because we focus on maximizing wealth instead of understanding our own situations, and what is achievable for us.

Lamonica: So we want to go through some of those situations. So you are able to navigate the space with a bit more context.

Jayamanne: And the first is a classic net worth guide and we see a lot of finfluencers using this as a tool to show that they've been able to grow their wealth. However, it's important to drill down and understand how they've outlined the wealth that they've built.

Lamonica: And this is where we go back to that classic Investing Compass conversation, which is a cash flow statement versus a balance sheet. This is a balance sheet perspective of the world and in most instances it's not a practical way to demonstrate wealth creation because it equates net worth with financial security.

Jayamanne: And we try not to be cynical, and there might genuinely be good intentions behind this, but this is one of the reasons why we don't believe that a balance sheet is the best representation of financial strength. Take for example one finfluencer who has $0.5 million as their net worth. This is very impressive, but it also includes her car, her laptop and property with mortgage in the calculations of her net worth.

Lamonica: And there's no further elaboration on how they got there or achieved their net worth. There is, however, the breakdown $2,000 for a laptop, $20,000 for a car and their property with which they've included capital growth, which by definition can only be an estimate.

Jayamanne: And we won't go through the whole episode for cash flow versus balance sheet. But there are a few issues with this and why it discourages or misleads new investors.

Lamonica: The first is that for those in their early 20s, having $0.5 million is just not the norm. There are plenty of variations of this type of information, but as new investors seeking out risky assets that will get them to $0.5 million by tomorrow. Looking broadly, this is the mentality of Wall Street bets, of ASX bets, any bet, but a focus on speculative stocks with no real justification or basis in the underlying valuation or focus on crypto or options trading, or CFD, all instruments that have a high rate of failure for individual investors.

Jayamanne: And getting burnt that young can have long term consequences. Many investors think that being young is the time to take a risk, time to invest in those speculative investments because you have time to recover, and we both disagree. Losing $1,000 when you're 25 has a much higher opportunity cost than losing $1,000 when you're 65. Assuming a 5% return per annum in 40 years, that $1000 is really a loss of seven times that. Of course increase that number of $1,000 and you see where excess risk to meet the expectations that investor set for themselves through comparison of unrealistic scenarios can really be detrimental to investor outcomes.

Lamonica: And then of course, there's this notion that everything you own should be included in your net worth to inflate that number. Of course, I guess I could sell all of my belongings for cash and then I'd have more cash, but is anyone realistically going to do this? No. Well then why include it in your investments? Why include a laptop or a car? Not to mention that they're depreciating assets that don't hold values. And of course they're not depreciated on these net worth calculations. They appreciate things like their house, but they don't depreciate things like a car. So a lot of these numbers are inflated, because in this world of online personal finance, having a larger bank balance gives you credibility in lieu of being qualified or having experience.

Jayamanne: A large amount of money is synonymous with success, as is the case with life in general, but in this case these influencers are promoting unrealistic scenarios to increase engagement, but it also ends up encouraging feelings of inadequacy and taking undue risk. The other issue with focusing on net worth, is that it always fluctuates while your financial security and position does not.

Lamonica: And while we try to be open in this podcast, we've drawn the line a bit on net worth. I've decided not to share my net worth or the dollar amount of my goals. I've done this because sharing your net worth is going to influence the perception that people have, and I felt my situation it's a distraction from what I think are the key lessons we're trying to impart. And quite frankly, we're all different. And my wife and I's decision to not have kids has a huge impact on my financial situation, which I'm sure most parents understand. I was also lucky enough to complete my education without any debt. Something that's a real privilege and something that I simply lucked into with my parents paying for it. The boost that it's had on my net worth and financial situation is not because I did anything smart, made any good decisions, or was smarter than anyone else. It was just luck.

Jayamanne: And in my case, I've decided to share my goal for retirement and be transparent about how I'm tracking against it. And I did this for the same reason that Mark chose not to, because I thought it would help people that were listening. I wanted to show that what you could achieve if you save and invest over long periods of time, which I have as I'm relatively early in my career. And I thought the numbers were important because saying things like comfortable retirement wouldn't really capture the full power of compounding. And I was in a bit of a different situation to Mark, I left uni with a HECS debt and I'm really happy to have paid it off in the last financial year.

Lamonica: Another popular Instagram figure has moved from advising on investments to advising on sales, coupon codes and "life hacks". However, they still every now and again post updates on their financial situation and how much money they've amassed.

Jayamanne: One of the posts has a worthy message. It explains how long it took for them to reach a certain milestone in net assets. The first 100K took 33 months, the next took 14 months, the next took six, and so on. The underlying lesson is good, which is compounding. It's a practical demonstration of the saying that the first million is the hardest.

Lamonica: And the first comment underneath this post was that's great, but how did you get there? And of course, no response.

Jayamanne: The second comment, my fiancé and I are in a similar position. We have $455,000 in home equity, $35,000 in cash, and $65,000 in combined Super. Need to look into stocks or potentially crypto.

Lamonica: And then the third comment was, hey, I signed up using your code for unnamed crypto trading company. I was promised a free Bitcoin, but I didn't get it.

Jayamanne: The influencer has 80,000 engaged followers. You can see from those three comments the issues that arise from this sort of information. The first is that there's no help for investors' trying to do this themselves. The last posts on this page include how to get cheaper coffee at Starbucks, the best wines at Kmart and what you can get at Aldi in Amsterdam.

Lamonica: Saving a few dollars in Starbucks, probably isn't going to get you there. And also I don't understand. You occasionally go to Starbucks.

Jayamanne: I do, yeah.

Lamonica: Yeah, as an Australian I find that strange. I don't drink coffee, so I certainly you know, talking about things out of my depth, which is not unusual, but…

Jayamanne: I mean I kind of just like it's very close to my house firstly and secondly I get a little like a Papa Chino for Priscilla, which is nice, it's just like cup of whipped cream. So yeah, there's a few reasons.

Lamonica: Okay. So, mostly for Priscilla.

Jayamanne: Yeah.

Lamonica: But anyway, back to this finfluencers. So the next two comments that we talked about. Don't address the fact that this influencer is sponsored by a crypto exchange, so the information that she posts about her net worth, although technically not connected to this, it's kind of implied, and this is where we see investors take unnecessary risk or invest in instruments they don't quite understand because they think that that is where this influencer got their success from.

Jayamanne: We're not naive. We understand why these types of influencers have an audience. The financial services industry is for the larger part sale, exclusive alienates a lot of people, especially minorities and a lot of their representatives aren't relatable or are hard to trust because they're trying to sell you a product.

Lamonica: Was that your polite way of saying stale, pale and male?

Jayamanne: I've never heard that before.

Lamonica: You've never heard that before.

Jayamanne: No.

Lamonica: Okay, well that's a way that people describe exactly what you just described.

Jayamanne: Yeah, right.

Lamonica: Yeah.

Jayamanne: Well, there you go.

Lamonica: Look at me teaching you new stuff.

Jayamanne: I know.

Lamonica: Alright, good for me. And we of course understand that we're part of the financial services industry so you know we recognize the issues that investors are facing and we're trying to actively change the situation to be more inclusive and to have a source of information that everyone can trust.

Jayamanne: And last example, an influencer who was explaining how they got out of debt. A little bit of background. This influencer is also one that posts about her net worth. She's done this for a long while but goes back to 2021 where she had $103,000 of net assets. She explains this in a post that she had a $3,000 of credit card debt and she used an app to help her get out of it and this app came out in 2021.

Lamonica: Now,we're not saying that you can't have assets and credit card debt at the same time, but if you had credit card debt, there was large enough balance that you had to manage plus over $103,000 in assets. Investors probably shouldn't be paying as much attention to you. This of course is an ad, an ad that does not outline in any way how investors should approach debt, how they should pay it down, why it's important to pay it down, but instead is focusing on just, you know, coming up with a referral code or promoting a referral code to an app, and it's labelled as an ad. But the icon on the post says in big writing how I got out of debt, deported by a smaller hash tag on the actual post that says ad.

Jayamanne: Of course, many investors have been burned in the past due to conflicted remuneration. We saw a bunch of reforms come in about how financial services professionals and advisors can advertise and invest in products on behalf of clients. There had to be a clear delineation and they were not allowed to be rewarded for choosing a particular product over another.

Lamonica: And now it's probably a good time to look at the future in this area because it is evolving. The Quality of Advice Review released by the treasury is looking at ways that financial information and advice can be more accessible. So since the Royal Commission, a sleuth of changes, came in to ensure that the quality of advice was raised, but with that came a lot of checks and balances in the form of compliance and regulatory requirements.

Jayamanne: Now we've seen financial advice is inaccessible for many Australians, with the cost skyrocketing as advice becomes less scalable. This review seeks to change that and make it accessible again, however, as part of the review, they're also looking to remove the requirement to operate under a license when giving general advice.

Lamonica: And you've listened to this podcast and you hear us give a warning at the beginning of each episode and at the end. This is to ensure you understand that the information is general and is not given with your situation in mind. What it also does is it ensures that we maintain high standards for the information that we give and it is regulated. Getting rid of general advice means that this information can be disseminated by anyone, whether they are or aren't qualified, whether they have any experience. And in the open market deciphering whether the information has come from a legitimate source or someone who is just learning themselves to become harder and harder.

Jayamanne: And it's important to us that this information is accessible. That's why we do the podcast, and we advocate for free resources. We also think it's important that the information is regulated and is always in the best interest of individual investors. The Quality of Advice Review was seeking feedback and will go through a review process before recommendations are made to the Attorney General.

Lamonica: Regardless of the outcome, it's important that you understand that your situation is unlike any other. Decisions about your investments and where you should be in life should not be made by comparing yourselves to an infographic without context on social media. We understand that adding a personal example or viewpoint helps with understanding how financial frameworks and constructs work in practice. That's why we do our portfolio reviews on half-yearly basis. We do this as an input into a larger process that takes time and effort. We think that investing can be hard. It requires legwork, and it requires you to do work, and we do not try to sell quick wins. As always, we'll continue to advocate for all investors starting and ending their financial journey in the same place with yourself. Based around your goals, your situation and your circumstances.

Jayamanne: And ultimately, we think that. Anything that increases the accessibility to quality financial advice is always a good thing and we will support that. There are some promising reviews that are outlined in the Quality of Advice Review that we think will contribute to this. We just also understand that there is no perfect solution until the industry gets to a point where it is appropriately and adequately serving individual investors, we will always advocate for a bit of healthy skepticism and a lot of reading and research.

Lamonica: Absolutely. So thank you for listening to our third episode on finfluencers, but not in a row and not part of the same series.

Jayamanne: Yes.

Lamonica: At least this one wasn't. But anyway, thanks very much for joining. We really appreciate it. We would love any comments you have. Any ratings you can give us in your podcast app. And if you want to drop us a line you can email me. My email address is in the show notes or leave us a voice message.