On August 30th, the Securities and Exchange Commission published a study regarding financial literacy among investors, as required by the Section 917 of the Dodd-Frank Act. In a 182 page report, the SEC examined 1) the existing level of financial literacy among retail investors; 2) methods to improve disclosures regarding financial intermediaries, investment products, and investment services, 3) information that retail investors need to make informed financial decisions, 4) methods to increase transparency of expenses and conflicts of interests, 5) existing efforts to educate investors, and 6) ways to increase investor financial literacy.
The study found that retail investors lack an understanding of basic financial concepts, such as diversification or the differences between stocks and bonds. Investors consider fees, investment strategies, and conflict of interest to be essential in their investment decisions and prefer clearly written disclosure documents that are easy to understand, with tables and graphs.
The study suggests that using the table format to explain fees and compensation is likely to = increase the transparency of expenses. The most effective existing efforts to educate investors were goal-oriented and research-based methods that are easily accessible to investors. In an effort to increase financial literacy of investors, the Office of Investor Education and Advocacy and organizations within the Financial Literacy and Education Commission will aim to create investor-specific programs, promoting the importance of checking the background and costs of investing.
While these findings may not be surprising, they come at a time when opportunities for retail investors are likely to expand through implementation of the JOBS Act, including both the SEC’s proposal to ease the general solicitation prohibition of private offerings and the JOBS Act’s potential for relaxed regulations regarding crowdfunding.
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