SEC Shows Much Progress to Be Made in Educating the Average Retail Investor

Friday, August 31, 2012

On August 30, 2012, The Securities and Exchange Commission (SEC) released a “Study Regarding Financial Literacy Among Investors.” The Study is mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  The results of the Study are based upon multiple sources, including online surveys, focus group research, public comments to the SEC and a Library of Congress review of studies of financial literacy among U.S. retail investors. 

The SEC concludes that “U.S. retail investors lack basic financial literacy . . . have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.” According to the Study: "[I]nvestors do not understand the most elementary financial concepts, such as compound interest and inflation,” nor do they understanding “the differences between stocks and bonds, and are not fully aware of investment costs and the impact on investment returns." 

Aside from shedding light on the general lack of knowledge in the retail investment population, a primary goal of the Study was to provide solutions. Most of these solutions centered on providing more transparency as well as more relevant and understandable information to the average investor.

The Study lists some common traits of retail investors. The Study found investors prefer to receive investment disclosures before investing (rather than afterwards, which often occurs). In reviewing disclosures, most investors preferred a visual format, using charts, bullets and graphs. The Study also identified information that most investors find useful and relevant in helping them make informed investment decisions. This includes information on fees, investment objective, performance strategy, and risks of an investment product. The Study also found that with regard to financial professionals, most investors care about professional background, disciplinary history and conflicts of interest.

It is anticipated that the SEC will act on this information to at least implement steps to give retail investors the tools they need to invest safely and successfully.
Click here for a link to the study.



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