LACK OF FINANCIAL KNOWLEDGE, CARELESSNESS
IS DANGEROUS MIX FOR OKLAHOMA INVESTORS

New National Survey Data Show Only 18 Percent of Investors Nation Wide Are Financially Literate; Weak Knowledge Worsened By Failure to Plan, Check Out Brokers.

OKLAHOMA CITY, OK.///May 14, 1996///The Oklahoma Securities Commission warned today that new national survey data about investor knowledge and habits suggest that a substantial number of investors need to learn the basics, develop a financial plan, and start checking out financial professionals, such as brokers and financial planners. The alternative is that these investors will remain “sitting ducks” for investment fraud and abuse, Irving L. Faught, Administrator of the Commission cautioned.

“We now know that only about one in five investors can be considered to be truly financially literate,” Faught said. “Very few have financial plans in place and even fewer take the time to contact this office in order to check on the disciplinary background of financial professionals. For investors in this state, I want to issue this urgent ‘wake-up’ call: if you are unaware of the basics and engage in careless behavior, you are openly courting victimization through investment fraud and abuse.

KEY SURVEY FINDINGS

The Oklahoma Securities Commission today joined the Arlington-VA.-based Investor Protection Trust (IPT), in releasing the national findings of an “Investor Knowledge Survey” conducted for IPT by Princeton Survey Research Associates. The survey involved interviews with 1001 investors nationwide between January 16-28. Among the key findings were the following:

• Extent of illiteracy. Less than a fifth (18 percent) of investors surveyed are truly literate about financial matters specifically related to investing. A substantial “gender gap” was uncovered; while about 25 percent of men scored at the top of the knowledge scale, only 11 percent of women achieved the same result. Additionally, older investors are “uninformed more often than younger investors,” according to IPT.

• “No-load” funds. Almost two-thirds (62 percent) of investors mistakenly believe that a “no-load” mutual fund involves no sales charges or other fees. Faught said, “While a “no-load” fund may not involve a front-end sales commission, all mutual funds impose management and other fees.”

• Diversification. Only half (51 percent) understand that the purpose of diversification is to reduce risk. Aside from ease and professional management, this is the basic rationale for mutual fund investing.

• Investor insurance. Just over half (55 percent) know that the Securities Investor Protection Corporation (SIPC) does not protect investments if the stock market goes down. SIPC provides such protection only when a brokerage firm goes out of business, not when an investor loses money in the course of the normal ups and downs of the marketplace.

• Bonds. Fewer than two in five (39 percent) know that when interest rates go up the prices of bonds usually go down. This is a fundamental concept in bond investing, which is relied upon heavily by some of the least sophisticated and most risk-averse investors.

Faught noted that the extent of investor illiteracy nationally is greatly worsened by what IPT refers to as “inattentive investment behavior.” Specifically, the new survey data found:

• Financial plans. Two-thirds of investors have never prepared a specific financial plan either on their own or with the assistance of a professional. Drawing up a financial plan is a fundamental cornerstone of handling money and preparing for the future, such as buying a house, funding the college education of children, and preparing for retirement./

• Checking out brokers. A shocking 88 percent of investors who have received advice from a financial professional have “never” looked into the disciplinary background of their broker or financial planner. “I strongly recommend that investors always call to get such information before investing with a stranger,” Faught said. For more information, call 405-280-7700. Or, write to: Broker Licensing Division, Oklahoma Department of Securities, Suite 860, First National Center, 120 N. Robinson, Oklahoma City, OK 73102.

WORKING TO RAISE FINANCIAL LITERACY

Faught commented: “While I do not want to seem to be an alarmist, it is very clear from these numbers that a substantial number of investors know too little and, intentionally or otherwise, act recklessly. Our office is committed to working with IPT and others to raise the financial literacy of state residents. This is particularly important in an era in which consumers are being forced to make more and more decisions about pensions and other critical financial matters.”

In recent years, the Commission has undertaken a number of investor education efforts, including:

• Distribution of the Investor Protection Trust’s video/brochure package, “What Every Investor Needs to Know - Preventing and Resolving Disputes With Financial Professionals.” This presentation gives investors practical advice about how to spot fraud and abuse and then what to do if the worst happens.

• Outreach to victims of limited partnership abuses at the hands of Major Brokerage Houses. The Department of Securities worked with other states to make sure that the affected investors knew of their rights of recourse and how to exercise them.

• Distribution of public service announcements warning of investment fraud and encouraging victims to Investigate before they Invest.

• Warnings issued jointly with the North American Securities Administrators Association (NASAA), including such topics as bogus IRA scams, wireless cable television lottery schemes, financial planner abuses, and penny stock swindles.

• Established an Internet World Wide Web site posting “Investor Alerts” and reporting enforcement activity: http://www.securities.ok.gov

Faught said: “We have excellent information on hand to provide to citizens and organizations. And we are happy to appear before any group, classroom, or other public setting to discuss investment basics and how to prevent victimization through financial fraud and deception. The Oklahoma Securities Commission is here to serve the public and we hope to be called on to an even greater extent in the future.”

ABOUT THE SURVEY

Princeton Survey Research Associates contacted a representative sample of 1,001 investors between January 16-28, 1996. Interviews were conducted nationwide by telephone. Those surveyed were identified to be financial decision makers with one or more of the following types of investments: bonds, mutual funds, commodities or other investments in futures, stocks in individual companies, or pension or retirement plans for which they make the investment decisions.

The investment knowledge index is based on eight factual questions. Those achieving a total of seven or eight correct answers were considered to be financially literate. Of the total sample, only 18 percent achieved this status.

For results based on the total sample, it can be said with 95 percent confidence that the error attributable to sample and other random effects is plus or minus 4 percentage points. A copy of the questionnaire, annotated with results for the total sample, is included in the appendix of the survey report. That document is available by contacting Alexis Sweeney, Investor Protection Trust, 703/276-1116.

The three-year-old Investor Protection Trust is an independent, non-profit charity dedicated to providing investor education and enforcement services on behalf of state securities agencies. In the field of investor education, IPT’s primary mission is to assist investors in making better-informed decisions.