Widespread Ignorance Invites Fraud
It would be shocking, you might agree, to believe that anything of great value and permanence could be constructed on a foundation of ignorance, bad habits and reckless behavior.
But those ingredients are mixed with more solid substances in the mortar of the biggest bull market of all time, helping to support a long series of record highs.
A warning was issued this month by the Investor Protection Trust, an investor education organization, after it contacted a representative sample of 1,001 investors.
The investors were asked elementary questions. Overall, they didn’t just fail, they flunked. Only 18 percent of those surveyed were able to answer seven or eight questions on an eight-point investor knowledge index.
How elementary? Only 39 percent knew that when interest rates rise, bond prices usually drop. Only 51 percent understood that the purpose of diversification is to reduce risk. And two-thirds mistakenly believed that no-load mutual funds charged no sales charges or other fees.
While prepared to hear the worst, trustee Mark Griffin, the Utah securities commissioner, said he hardly expected the extent of the ignorance would be so striking. Millions of investors, he says, are sitting ducks for fraud.
The most vulnerable of them, according to the survey, are the elderly and women, only 11 percent of the latter scoring at the top of the knowledge scale - that is, able to answer seven or eight questions correctly.
Of investors age 65 or above, almost half could answer no more than three questions, and some none at all. They were also the least likely to know that brokers earn their keep through commissions, not investment success.
The significance of the findings is made more acute by unique factors.
Millions of investors are new to the stock market in the past few years, having transferred out of relatively safe bank certificates of deposit.
Expectations are changing too. Griffin observes that this is a society “moving increasingly to a ‘self-serve’ approach to personal finance,” an era requiring informed decisionmaking to finance homes, education and retirement.
Where lies the blame? Griffin laments the lack of content in the curricula of schools. “If they are content to graduate people able only to understand a checkbook, those people won’t be able to defend themselves,” he says.
He suggests the entire investment community, broadly stated, has a lot of work to do.
The media, he believes, would be more helpful if it paid greater attention to the rudiments of the marketplace rather than the flash and glitter of initial public offerings and high-tech and high-flying stocks.
As for the regulators: Griffin believes information garnered in the survey provides them with a baseline for building an investor safety net of knowledge. Already, he says, it is well under way at the IPT.
IPT emerged in 1993 from a settlement resolving multistate charges of misconduct by Salomon Brothers in the Treasury market. Half the $4 million settlement created IPT, dedicated to investor education and fraud prosecution.
Since then it has distributed more than 30,000 copies of a video-brochure package, “What Every Investor Needs To Know: How to Prevent and Resolve Problems with Financial Professionals.” It is free: Call 1-202-857-8404, or write 1901 No. Fort Meyer Drive, Arlington, VA 22209.