U.S. retail investors lack basic financial literacy, particularly among women, African- Americans, Hispanics, the elderly, and those who are poorly educated, according to the Securities and Exchange Commission (the “SEC”) in a study published on August 30, 2012.

The Financial Literacy Study, required by Section 917 of Title IX of the Dodd-Frank Act, included a report from the Library of Congress aggregating and assessing existing studies regarding financial literacy, online investor surveys and focus groups conducted by a consultant, and a request for public comment on the issues.  

The SEC also sought comment on the most effective private and public efforts to educate investors. Based on findings regarding the characteristics of effective investor education programs, the staff set forth goals for improving the financial literacy of investors:  

  • to develop joint investor education programs that target specific groups;
  • to increase the number of investors who research investments or investment professionals before investing;
  • to promote the SEC’s www.investor.gov website as the primary federal government resource for investing information; and
  • to promote awareness of the fees and costs of investing.  

The report reviewed public comments received as well as data from the quantitative and qualitative research authorized by the Commission. The staff identified: (i) opportunities to improve the timing, content, and format of disclosures; (ii) information for investors to consider when selecting a financial professional or purchasing an investment; (iii) how to improve disclosure of expenses and conflicts of interest; and (iv) what information was most useful and relevant to retail investors when making informed decisions about financial intermediaries or investment products and services.

Timing. Commenters said that retail investors should receive disclosure either before or contemporaneously when they make an investment decision, a practice confirmed by data that showed that retail investors prefer to receive disclosure before making such a decision.  

Content. Commenters expressed a preference for a “layered disclosure” framework, that is, a document that summarizes key disclosures and tells them where to find more detailed information. Commenters strongly supported plain-English summary disclosures, including information about objectives and risk, fees and expenses, eligibility, and conflicts. The empirical data suggested that retail investors value some information, such as price and unit numbers, over other information, such as the capacity in which third parties receive compensation.

Format. “Format,” for purposes of the study, includes both delivery method and format of the disclosure document. Although most commenters preferred electronic delivery of disclosure material, they also wanted hard copies available. Investors, however, prefer hard-copy versions of adviser brochures, but prefer hypothetical point-of-sale documents by electronic delivery. The data showed that retail investors prefer graphics over narrative disclosure.  

Transparency. Commenters suggested ways to increase transparency in disclosures concerning advertising, conflicts of interests and expenses. The empirical data demonstrated that retail investors do not, in fact, understand existing fee and compensation information.  

Useful and Relevant. In general, commenters believed that retail investors want clear information about fees, performance, and investment strategy to make informed decisions about investments and financial intermediaries. Commenters suggested that investors found information about financial intermediaries, including background and disciplinary history, standard of care, conflicts and compensation, highly relevant. With respect to investment products, they particularly seek risk disclosures.