Investors Still Largely in the Dark
January 9, 2006
Even in the financial world the term "survival of the fittest" comes into play. In the U.S, investor education needs to measure up if it is going to be useful to investors, as the fittest investor is the one with the most extensive knowledge.
A survey conducted by Opinion Research Corp. of Princeton, N.J., on behalf of Investor Protection Trust and Securities Investor Protection Corp., both of Washington, recognizes that investors not only need to know certain key facts and concepts to be ahead of the game, they also need to learn the behavioral process of investing.
Investor Protection Trust and Securities Investor Protection conducted the telephone survey among 2,063 adults (1,036 men and 1,027 women) ages 18 and over between Nov. 17 and 21. More than four out of five investors, or 83%, failed the overall test of key knowledge and behavior. Women were more likely to fail than men by a margin of 91% to 77%. Only 17% of the respondents passed the test on basic knowledge and behavior and a scant 1% of investors got all of the questions correct.
However, there were some bright spots in the 2005 survey. Almost three out of four investors understood the concept of diversification. This is impressive, especially when compared to only 51% of investors who knew and understood the concept in 1996.
The new survey also shows that one-third of investors (36%) have checked out the disciplinary backgrounds of their stockbroker or investment adviser. This is quite an improvement from the one in 10 in 1996. Sixty-one percent said the reason that they did not check out their broker or adviser is because they trusted the individual, and 9% reported that the individual assured them there was nothing to worry about.
In 1996, 66% of investors had a financial plan, and in 2005 that number is up to 77%. However, fewer than three out of five investors said that they have ever read a prospectus.
"Investor Protection Trust is committed to raising the bar on investor education in America, said Don Blandin, president and CEO of the company. "We have embarked on several important projects that are making a difference today, including the national "MoneyTrack" public television series, a partnership with the American Library Association called "Investor Education at Your Library" and a national "Campaign for Wise and Safe Investing" in collaboration with the AARP Foundation."
Also on the brighter side of things, 90% of investors claim they actually read their brokerage account and/or mutual fund statements, and only 9% said that they do not. Investor Protection Trust and Securities Investor Protection stressed that reading statements is an important way investors can protect themselves.
"We are encouraged that people understand the need to go over their account statements carefully to make sure that everything is in order," Securities Investor Protection President Stephen Harbeck said. "But these findings indicate just how big a job remains."
Only 21% of investors claim that they practice all four of the desirable behavioral traits: reading prospectuses, regularly reviewing account statements, checking out disciplinary backgrounds of brokers and/or financial planners, and having a financial plan in place.
Investor Protection Trust noted that one of the most disturbing findings of the survey was that fewer than one in 10 investors, or 8%, understand that there is no such agency that insures investors against losing their money as a result of fraud in a portfolio. Forty-two percent incorrectly identified the Securities and Exchange Commission as an organization that provides such insurance, 41% identified the Federal Deposit Insurance Corp., and 23% cited Securities Investor Protection Corp.
Another indication of just how weak investors' knowledge is, is the fact that fewer than two in five investors, or 39%, understand sales feeds and commissions and how they work. However, 61% of investors correctly understand that most brokers and financial planners are paid through commissions on the sales of products.
Forty-one percent of investors know that as interest rates go up, bond prices go down. Two out of three investors comprehend that stocks have had the best long-term returns for investors.
"I think these survey findings really are the call to those of us in investor education to redouble our efforts to make sure that all Americans are wise and safe investors," Blandin said.
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