The SEC has found that most investors understand very little about the financial products they buy. In the wake of the financial crisis, Congress, suspecting that the financial illiteracy of ordinary investors played a role in the crisis, commissioned a study by the SEC as part of the Dodd-Frank mandate. The SEC has completed its study and issued its report, and the findings are indeed shocking.
In the words of the SEC report: “”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.”
In reaching its troubling conclusion, the SEC surveyed 5,000 retail investors. They were asked to read a summary of information about a hypothetical mutual fund, and answer questions designed to show whether they understood what they had read. The results, according to the SEC: “Many of the online survey respondents … who claimed to understand fee and compensation disclosure in the Brochure, in fact, did not.”
Only half those responding agreed that the documents were “written in a language that they understood.” (“SEC Study Proves That Stock-Picking Should Probably Be Left to the Professionals,” by Kevin Roose).
“To be fair to investors,” writes Mr. Roose, “I’ve seen some pretty terrible mutual fund documents in my day.”
Investors often get little if any help from their financial advisors, who often know little more than sales-script information about the financial products they sell.