As part of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Securities and Exchange Commission was tasked with conducting a study to identify the existing level of financial literacy among retail investors and methods and efforts to increase the financial literacy of investors.
In its research, the SEC found that U.S. retail investors lack basic financial literacy and have a weak grasp of elementary financial concepts. They also lack critical knowledge of ways to avoid investment fraud, according to the study.
Women, African-Americans, Hispanics, the elderly and those who are poorly educated have an even greater lack of investment knowledge than the average general population.
Based on these findings, the staff identified methods to improve the timing, content and format of disclosures and useful relevant information for investors to consider when either selecting a financial intermediary or purchasing an investment product; and methods to improve the transparency of expenses and conflicts of interest.
The study found that companies need to release disclosures before someone makes a decision on whether to engage a financial intermediary or purchase an investment product or service.
Disclosures about financial intermediaries must include fees, disciplinary history, investment strategy, and conflicts of interest to be absolutely essential. Investors favor summary documents containing key information about the investment product, with respect to investment product disclosures.
Investors prefer disclosures to be written clearly, concisely and in understandable language, using bullet points, tables, charts and graphs.
Companies should increase the transparency of conflicts of interest by providing specific examples that demonstrate how a potential conflict of interest would operate in relation to the specific advice furnished to the client; present the conflicts of interest disclosure in a bulleted format or in a summary table format; and make the conflicts of interest disclosure more specific, even if it results in a lengthier disclosure document; make the conflicts of interest disclosure brief and more general, with more specific information available upon request; and disclose whether a financial intermediary stands to profit if a client invests in certain types of products, whether they would earn more for selling specific products instead of other comparable products and whether the financial intermediary would benefit from selling financial products issued by an affiliated company.
The study also found ways to improve financial literacy among investors by targeting young investors, lump sum payout recipients, investment trustees, the military, underserved populations and the elderly; promoting the importance of checking the background of investment professionals; promoting investor.gov as the primary federal government resource for investing information; and promoting awareness of the fees and costs of investing.