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Study: Investors Lack Basic Financial Literacy

Investors, especially elderly investors, want and desperately need more information regarding financial professionals and investment products and services, says a new report from the Securities and Exchange Commission (SEC). The report also shows that investors lack critical knowledge of ways to avoid investment fraud.

Results of the study – which was conducted by the SEC and mandated by the Dodd-Frank Wall Street Reform Act and Consumer Protection Act – revealed in-depth findings about investors’ understanding of their investments.

“Studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation. Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. Moreover, based on studies cited in the Library of Congress Report, investors lack critical knowledge about investment fraud,” stated one passage in the 182-page report.

Among the key findings of the study:

  • Fees, investment performance and disciplinary history are top priorities for investors when choosing an investment advisor.
  • Investors want a plain language description of the investment product being offered.
  • A narrative explanation of advisor fees and compensation and a fee table would be useful to investors.
  • The majority of regular investors surveyed found prospectuses highlighted important information and were well organized, but only around half of them thought they were user-friendly or written in clear, concise language that they could understand.
  • Approximately 31.8% of the survey respondents indicated they understand the term, annual asset fees, while about 46.2% of respondents indicated they thought they knew what the term means. When asked to determine which mutual funds provided the greatest and least financial incentive to sell their shares, less than one-seventh of online survey respondents correctly determined that additional information would be needed to make this determination.
  • Slightly more than one-half (55.1%) of online survey respondents indicated they  want to know whether the individual advising them (as opposed to the financial services firm itself) would receive some of the portion of these annual asset payments.

“What is alarming is Americans seem to believe they are far better at handling their finances than they actually are,” said FINRA Foundation President Gerri Walsh in a recent NBC article. “This is particularly worrying, given that most investments Americans make are for their retirement.

“When you stack investor knowledge against what people are doing with their retirement investments you see a frightening picture emerge,” she said.


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