A New Investor Study: Ask Yourself These Questions

If you invest outside of a retirement plan, there are important findings in a new FINRA Foundation study Investors in the United States 2016 that you should be aware of.

Investors in the United States 2016
Have you looked up the
background of your
financial professional?
It’s free and takes just
a few minutes to do so
using FINRA
BrokerCheck.

The findings are interesting—but what’s really valuable is to ask some blunt questions about your own investment knowledge and behavior.  Here are five key findings, and some questions you should ask yourself in light of the report’s findings.

1.  Non-retirement account investors are a minority. Individuals with non-retirement investment accounts constitute less than a third (30 percent) of the national adult population. As a group, they are slightly more likely to be male, and considerably more likely to be older, white and college educated. Predictably, investors are likely to have higher incomes than the population at large. About a third of respondents report having less than $50,000 in non-retirement investments, another third report between $50,000 and $250,000, and slightly less than a third report having more than $250,000.

Ask Yourself: Do you know what you own? You can learn a lot by reading your account statements each month and taking time to learn how you can make and lose money with each investment.

2.  Investors use financial professionals—but most don’t check them out. More than half of respondents (56 percent) report using a financial professional—such as a broker or advisor—primarily to improve investment performance (81 percent), avoid losses (78 percent) and learn about investments (63 percent). However, most investors do not check with regulators to confirm the registration status and disciplinary history of these professionals, nor do most investors ask basic questions about how they get compensated. Less than a quarter (23 percent) of investors who use a financial professional have checked with a regulator on the background of a financial professional—compared to 69 percent of investors who have read an online restaurant review and 38 percent of used-car buyers who used Carfax.

Ask yourself: Have you looked up the background of your financial professional? It’s free and takes just a few minutes to do so using FINRA BrokerCheck. Over half (58 percent) of those who use an advisor say that professional designations or certifications are very important. If you count yourself among that group, learn more about the any designations your advisor holds using FINRA’s professional designations tool.

3.  Knowledge of investment concepts is low. Only 10 percent of the respondents who took a 10-question investor literacy quiz could answer eight or more questions correctly. The majority (56 percent) were able to answer fewer than half of the questions correctly. Women were significantly more likely to say they did not know the answer to a question compared to men, perhaps pointing to differences in investor confidence by gender.

Ask yourself: How well do I know the basics of investing? You can start by reviewing the questions and correct answers to the quiz in the Investor Literacy section of the study. For example, most investors failed to answer correctly the question, Which of the following best explains the distinction between nominal returns and real returns? The correct answer is that nominal returns are not adjusted for inflation while real returns are. Only 12 percent of respondents answered this correctly.

4.  Investors own individual stocks and mutual funds. Seventy-four percent of households surveyed report owning individual stocks and 64 percent report owning mutual funds. Individual bonds are held by only 35 percent of this population and annuities by 33 percent. Other investments such as exchange-traded funds, REITs and annuities were held by much smaller percentages of the investor population. Investors with lower portfolio values tend to hold a less diverse mixture of investment vehicles than those with higher portfolio values. Additionally, it is notable that among those with portfolios of less than $50,000, individual stocks are by far the most common investment (71 percent), rather than mutual funds (46 percent) as might be expected. Mutual funds are as likely to be owned as individual stocks by those with portfolios of $50,000 or more.

Ask yourself: Do I understand the concept of diversification? Particularly, if you own only individual stocks, consider having a conversation with your financial professional about diversification. Prepare by reading FINRA’s Diversifying Your Portfolio.

5.  Some investors understand advisor compensation—and some don’t. Only slightly more than half (56 percent) of those who use a professional advisor report having a clear understanding of how their advisor gets compensated (8 to 10 on a 10-point scale). And less than half of investors (47 percent) say they have asked their advisor how he or she gets compensated. The report also notes that sales incentives don’t bother the majority of investors who use a financial professional. Fewer than half (43 percent) of investors who use a financial professional are worried that sales incentives present a conflict of interest.

Ask yourself: Do I know how my financial professional is compensated? If you are not sure, then ask.

The investor survey is a component of the FINRA Investor Education Foundation’s National Financial Capability Study, one of the largest and most comprehensive financial capability studies in the country. Data for the survey were collected in July 2015.

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