It took a Congressional mandate and a 182-page report from the Securities and Exchange Commission to tell us the bad news: the investing public has absolutely no idea what its doing.
The Dodd-Frank Act required the SEC to examine financial literacy among retail investors. And what it found is a wake-up call: most Americans fail to (or don’t care to) grasp “the most elementary financial concepts”.
Two-thirds of the investing public cannot calculate how much their broker would pocket on the sale of mutual fund shares. Only 25% can accurately figure out an advisors’ fee for managing their portfolio. And half of retail investors cannot read an investment account statement or a stock trade confirmation correctly. Only 25% of investors are able to identify a custodial firm on an account statement.
The report concluded that retail investors “lack basic financial literacy”.
But it’s worse than financial illiteracy. Its apathy. The investing public doesn’t seem too concerned about their portfolios…or about their advisors. 76% of investors did not look into their advisors background with the SEC. And only 36% of investors want to know how their advisor is compensated before they start using their services. Even worse: only 52% say that it is “essential” to know about any conflicts of interest before they start a relationship with an advisor.
The same indifference goes for choosing investments: only 6% of investors use a mutual fund prospectus as the source of information before investing. And 38% “very rarely or never” read a prospectus because they are “too complicated”, “too long” or “too boring”…67% would throw a prospectus away after receiving it. One respondent told the SEC “if you can’t put it on a 4×5 card, I don’t want to deal with it”.
And that indifference goes for monitoring investments, too: just 42% say that they “always” check their investment account statements…and 26% “usually” check.
On Wall Street, mom and pop retail investors are commonly known as “dumb money”. And most of the “dumb money” from the SEC study have full-time jobs, a college background, and a middle-class income. The financially illiterate “dumb money” is your average, every day American…that’s food for thought.