man with suitcase in library

The United States Securities & Exchange Commission, as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act issued a report today on Investor Literacy.

Retain Investors Lack Knowledge to Prevent Fraud

Not surprisingly, the study found that U.S. retail investors lack basic financial literacy and that investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud. Surveys also demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.

The study also concludes that “low levels of investor literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans.”

Most disturbingly, some of the online survey respondents on the Brochure panel did not believe that their investment advisers had conflicts of interest, and with respect to account statements, only 57.5% of the respondents indicated that they “somewhat” understood the information in the statements, with the remaining respondents split between understanding the information fully (25.9%) or not at all (16.6%).

Investors Need Education on Four Main Areas

  1. Different types of risk
  2. The fees and costs associated with investing
  3. Proactive steps for avoiding fraud
  4. General investment knowledge

The NASD (FINRA) Investor Education Foundation Study

In 2006 the NASD Investor Education Foundation (now known as the FINRA Investor Education Foundation) conducted a study that focused on consumer fraud directed at older Americans. The NASD Investor Fraud Study distinguished between victims and non-victims of financial fraud. Contrary to expectations, the study found that fraud victims actually scored higher than non-victims on a financial literacy quiz, indicating that even knowledgeable investors are susceptible to fraud

The elderly are especially susceptible to fraud because, according to a 2007 study by the Investor Protection Trust, almost half of them erroneously believe that securities registered with the Securities and Exchange Commission (SEC) are safe, which we all know is not true.

Perhaps most shockingly, according to the 2009 National Financial Capability Study, only 15 percent of respondents indicated that they had “checked an advisor’s background or credentials with a state or federal regulator”.

MoneyTrack/IPT Investing Secrets Survey

Some 43 percent of investors canvassed in the 2007 MoneyTrack/IPT Investing Secrets Survey demonstrated a susceptibility to investment fraud. These respondents indicated that they would be likely to invest in one of three get-rich-quick schemes promoted as “can’t lose” opportunities. Among those most likely to invest in such schemes were young people from age 18 to 24 (79 percent), Southerners (47 percent), and people with less than a high school education (63 percent).

SEC Contracted Siegel+Gale for Investor Research & Identified:

  • Methods to improve the timing, content, and format of disclosures to investors, with respect to financial intermediaries, investment products, and investment services
  • The most useful and understandable relevant information that retail investors need to make informed financial decisions before engaging a financial intermediary or purchasing an investment product or service that is typically sold to retail investors, including shares of open-end companies and Methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products, including shares of open-end companies

Guiliano Law Group

If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.