Most Investors Know Too Little, a Survey Finds
Over the last decade, as financial scandals have rocked the country, hundreds of millions of dollars in legal settlements paid by brokerage firms and mutual funds have flowed to investor education groups. They’ve put up websites, published booklets and financed seminars in the hopes that, armed with information, investors would be less likely to be duped.
But the message apparently isn’t getting through, according to a recent survey .
The Securities Industry Protection Corp. and the Investor Protection Trust, an education group financed by brokerage settlements, reported last week that a survey of supposedly savvy investors indicated that many were surprisingly ignorant about financial matters and seemed almost careless with their money.
Most investors knew what “diversification” meant, but little else, the survey said. Investors also frequently failed to take basic protective measures such as reading prospectuses and checking on the disciplinary history of their brokers.
The one bright spot: 90% read their monthly account statements.
“We are encouraged that people understand the need to go over their account statements carefully to make sure that everything is in order,” SIPC President Stephen Harbeck said. “But these findings indicate just how big a job remains.”
The survey, conducted in late November, asked more than 2,000 adults whether they were active or passive investors. To focus the study on only the most sophisticated investors, the rest of the survey was given to the 635 who identified themselves as active investors -- those who said they chose their own stocks, bonds and advisors.
Still, 83% failed the 12-question test.
To be sure, the passing grade was set high. To pass, investors needed to get three of four behavior questions and six of eight knowledge questions correct -- a 75% score.
Some of the responses were troubling, the survey’s sponsors said. For example, at a time of rising interest rates, the value of existing bonds is likely to drop as the rates rise. But only 41% of those surveyed said they understood this relationship, according to the survey. Nearly one in four thought bond prices would instead rise with interest rates.
In addition, 80% of respondents believed that some organization insured them against investment fraud losses. Although SIPC will return securities held by a brokerage firm to the investor if the firm goes bankrupt, no group insures against investment fraud losses. More than four in 10 investors mistakenly thought the Federal Deposit Insurance Corp., which protects bank deposits to $100,000, would step in to cover investment fraud losses as well.
Just 39% of those surveyed properly identified a “no load” mutual fund as the type of fund that’s sold without a commission or sales charge.
Lack of basic knowledge wasn’t the only problem. Many investors also didn’t take action to protect their nest eggs, according to the survey.
“We all recognize that investors need to know certain key facts and concepts,” said Don Blandin, head of the Investor Protection Trust. “But it may be even more important to their long-term financial security that investors learn the behavioral process of investing.”
The study’s authors said they believed that all investors ought to do four things: Have a financial plan, read their monthly account statements, read prospectuses before they invest and check out the disciplinary history of a broker before they hand over any money.
Most active investors have a financial plan, according to the study. And the vast majority are reading their account statements.
Unfortunately, few read prospectuses and fewer look to see if their broker has been disciplined by regulators.
Only about half of investors said they’d ever read a prospectus for either a mutual fund or an initial public stock offering. For mutual fund investors, these documents disclose important items such as the fees and charges they would have to pay as well as historical investment returns and risks of investing in the funds.
With initial public offerings, the prospectus includes key information such as the background of a company’s management -- whether it has a wealth of experience or a sordid history.
Only 36% of active investors checked their broker’s background, according to the survey. Of those who didn’t check, 61% said they trusted their broker, 22% didn’t know how to check backgrounds, and 9% said their broker told them not to bother.
Investors can check their broker’s disciplinary history either by calling the National Association of Securities Dealers’ hotline at 800-289-9999 or visiting the group’s website: Go to www.nasd.com and click on the “Investor Information” tab at the top of the page, and then the link “Check Out Brokers & Advisers.” Investors need to know the broker’s full name and the name of the firm where the advisor works. If they have the broker’s license number -- the CRD number -- the broker’s record can be accessed with just that number and his or her last name.
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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy .kristof@latimes.com. An archive of recent columns is at www.latimes.com/kristof.
