NEW SURVEY SHOWS URGENT NEED FOR INVESTORS TO LEARN
KEY INVESTOR KNOWLEDGE, BEHAVIOR

Despite Encouraging Signs on Understanding of Diversification and Need to Review Account Statements, Few Investors Possess Needed Blend of Basic Knowledge and Smart Behavior.
 

ATLANTA … Secretary of State Cathy Cox cautioned today that a recent national survey shows the vast majority of U.S. investors do not appear to possess important "investor survival skills" needed to build their savings into a retirement nest egg.

A Securities Investor Protection Corporation (SIPC)/Investor Protection Trust (IPT) survey released on December 13, 2005 found that more than four out of five of active investors (83 percent) failed the SIPC/IPT test of key knowledge and behavior. Only 17 percent of respondents correctly answered a sufficient number of questions on knowledge (six out of eight questions) and behavior (three out of four questions).

“This survey is a yardstick that shows us how investor education in Georgia and the rest of the nation needs to measure up if it is going to be helpful to investors.  Everyone recognizes that investors need to know certain key facts and concepts, but it is important that they learn the behavioral process of investing – such as checking the background of a stockbroker or investment advisor – that may prove to be just as critical to their success in the long run,” Secretary of State Cathy Cox said.  “The task of making investors wiser and safer is by no means an impossible job, but it is a long road on which those of us in this field still have a quite a ways to go,” she added.

Secretary Cox highlighted ongoing investor education efforts by Georgia’s Securities division.  Funded by the IPT, the Secretary of State’s office has held 22 free investor education seminars since January 2004 in communities across the state, with plans to hold two more by mid-February 2006.  Partnering with more than 400 community organizations, state agencies and elected officials, the office has reached approximately 6,000 Georgians.  In addition, the Georgia Consortium for Personal Financial Literacy has conducted teacher trainings at six of the seminars.

Two of the few "bright spots" in the SIPC/IPT survey findings had to do with account statements and diversification.  In responding to a key behavior question, nine in 10 investors said that they regularly review their brokerage account and/or mutual fund statements.  On the knowledge side of the survey, nearly three out of four investors (74 percent) showed that they understand the concept of diversification, which has been a major focus of investor education efforts by the Investor Protection Trust and other groups.  However, just one in five investors (21 percent) said that they practice all four of the desirable behavioral traits focused on in the SIPC/IPT survey:  reading prospectuses, regularly reviewing account statements, checking out the disciplinary backgrounds of brokers/financial planners, and having a financial plan in place.

Other key findings of the SIPC/IPT survey include the following:

·        Not much more than a third of investors (36 percent) have checked out the disciplinary backgrounds of their stockbroker and/or financial planner.  Perhaps even more disturbingly, seven out of 10 of those who did not check their financial planner's background indicated they did not either because they trusted the individual in question (61 percent) or the individual had assured them that there was nothing to be concerned about (9 percent)!

·        Less than one in 10 investors (8 percent) understand that NO agency or organization "insures you against losing money as the result of fraud in your investment portfolio." A total of four out of five investors incorrectly identified one or more of the following entities as providing such insurance:  Securities and Exchange Commission (42 percent); Federal Deposit Insurance Corporation (41 percent); and SIPC (23 percent). (These percentages add up to more than 80 percent, since more than one answer was permitted.)

·        Another indication of the weak state of investor knowledge:  Fewer than two in five investors (39 percent) understand how sales fees and commissions work in the no-load mutual fund context.  A nearly equal number of investors (38 percent) answered the no-load question incorrectly and another 12 percent either indicated they did not know or refused to provide an answer.

·        Other key investor behavior findings:  Fewer than three out of five investors (58 percent) said that they have "ever" read a prospectus. Additionally, more than three out of four investors (77 percent) claimed to have a financial plan of some sort in place.

·        Other key investor knowledge findings:  Only 41 percent understand the bond investing basic rule that as interest rates go up, bond prices tend to fall.  More than a quarter of investors (28 percent) predicted bonds will move in the wrong direction, 16 percent said bond prices would remain the same, and 14 percent either didn't know or refused to answer. Fewer than three in five investors (57 percent) can correctly define a prospectus.  About three out of five investors (61 percent) understand that most brokers and financial planners are compensated through commissions on product sales.  Two out of three investors understand that stocks have had the best long-term return for investors, compared to those who incorrectly identified CDs (14 percent), bonds (11 percent) and savings accounts (2 percent).

For full survey findings (including methodology), visit http://www.sipc.org.  The self-scoring version of the SIPC/IPT survey is available online at http://www.sipc.org/survivalquiz, or contact Ailis Aaron, (703) 276-3265; and Don Blandin, Investor Protection Trust, (202) 775-2112 or Blandin@investorprotection.org.