The grim state of financial literacy in America
September 07, 2012
In a 182-page report released last month, the Securities and Exchange Commission arrives at a stark conclusion: Americans as a group have a weak grasp of financial concepts and lack basic investment knowledge.
The SEC Study Regarding Financial Literacy Among Investors was mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Its findings draw upon a variety of sources including online surveys, focus groups, public comments and review of other studies, including a Library of Congress report on financial literacy.
Financial literacy findings
Even with the tremendous amount of information available both online and offline, many Americans appear to be confused regarding finance basics. The SEC concluded most Americans -- referred to as retail investors in the report -- fail to grasp even elementary financial concepts.
Topics cited by the SEC as areas of confusion include the following:
- Compound interest
- Differences between stocks and bonds
- Investment costs
- Investment fraud
While the study indicates there is a general widespread lack of knowledge regarding financial concepts, it also called out specific subgroups that it says are more likely to have less knowledge in these areas than the general public.
These groups identified in the SEC report include the following segments of the population:
- The oldest segment of the elderly population
- The poorly educated
Working to educate investors
Within the report, the SEC also outlined strategies to improve financial literacy. These findings were made in conjunction with the Financial Literacy and Education Commission (FLEC).
The FLEC members participating in the study identified four areas to focus education efforts.
- Types of risk in investing
- Fees and costs associated with investing
- Steps for avoiding investment fraud
- General investment knowledge
In addition to these areas, the FLEC participants proposed targeting certain investor groups, such as young investors, underserved populations, older investors and members of the military.
Investor disclosures discussed
Beyond discussing general financial literacy, the SEC study also considered investor disclosure preferences.
According to the report's findings, investors like to receive information about fees, investment objectives, performance, strategy and risk prior to making an investment. In addition, most investors prefer to receive these disclosures in a visual format such as charts and graphs.
The SEC report includes several suggested methods to increase the transparency of disclosures. These include simplifying disclosure language, providing a narrative as well as a fee table, and adding examples to accompany fee and compensation tables.
It remains to be seen if and how the SEC report will change financial literacy education efforts or product disclosures. However, for now, it seems it wouldn't hurt most Americans to spend a little time brushing up on their knowledge of finance basics such as bank rates, investment options and retirement funds.