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SEC: Americans financially inept

By Sheyna Steiner · Bankrate.com
Friday, August 31, 2012
Posted: 11 am ET

Remember Dodd-Frank? How could anyone forget it? In it, there was a mandate to the Securities and Exchange Commission, or SEC, to study financial literacy among American investors. It's out now, and it turns out American investors do not have high levels of financial literacy.

First, the SEC asked the Library of Congress to review existing studies. The verdict? Not only do average U.S. investors lack basic financial literacy, some groups fare even more poorly, including women, African-Americans, Hispanics, the very elderly and the poorly educated.

That's not an insignificant slice of the already-floundering population.

Then the SEC did its own research to find out how people read investing materials and disclosure documents and what they think about a range of investing topics.

Based on the abysmal level of understanding out there, the SEC came up with methods to communicate with investors that would better convey information that investors need.

Here's the information that investors consider useful when hiring a financial professional:

  • Fees/expenses/compensation.
  • Investment performance/track record.
  • Investment strategy.
  • Disciplinary history.
  • The identity of the firm and the scope of services offered.
  • Sources and amount of compensation to the financial intermediary.

This information is useful before purchasing an investment product:

  • Fees/expenses.
  • Investment performance.
  • Principal risks.
  • Investment objective.

Also included were methods to increase the transparency of conflicts of interest, since obviously eliminating or mitigating conflicts of interest is still a nonstarter, but I digress.

According to the SEC's report, "Retail investors have a range of reactions towards conflicts of interest issues." The reactions ranged from completely ignorant of any possible conflicts of interest to satisfied with the level of disclosure they had already received. Others just didn't think about it too much.

But the agency did glean some helpful hints as to the best way to communicate those conflicts:

  • Present the conflicts of interest disclosure in a bulleted format.
  • Present the conflicts of interest disclosure in a summary table format.
  • For trade confirmations, disclose whether a financial intermediary is registered both as a broker-dealer and investment adviser.
  • For trade confirmations, disclose whether a financial intermediary suggested or recommended a particular investment.
  • For account statements specifically, disclose the sources and amounts of compensation received by the financial intermediary.
  • 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.
  • Disclose whether a financial intermediary (the individual representative) stands to profit if a client invests in certain types of products, whether the financial intermediary would earn more for selling certain specific products instead of other comparable products and whether the financial intermediary might benefit from selling financial products issued by an affiliated company.
  • Disclose whether the financial intermediary (the individual representative) providing advice would receive a portion of annual asset fees paid by the client.

There's some debate about whether or not disclosing conflicts of interest is as good a solution as a uniform fiduciary standard for finance professionals. I personally think that it's difficult for clients to make objective decisions in the face of an authority in many cases. While disclosing conflicts of interest is better than the alternative, it's not the solution that is in the best interest of the client. A fiduciary standard, by definition, is.

On a separate but related topic, this incredibly brief quiz from the Squared Away Blog at the Center for Retirement Research at Boston College could give you some insight into your own level of financial literacy.

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Follow me on Twitter @SheynaSteiner.

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