How do investors make their decisions? The answer, of course, varies from investor to investor, but the FINRA Investor Education Foundation recently sought to better understand the answer through a survey of 2,000 investors with non-retirement investment accounts.
The survey looked at investors age 18 and over with investments held in accounts outside the standard 401(k), Roth IRA or the like.
“Investing in a taxable brokerage account involves a different set of decisions that participants in a structured retirement plan might not face,” said Gerri Walsh, the president of the Foundation. “When you’re investing in a retirement plan at work, the employer has chosen the plan provider, and the plan provider has chosen the investment professionals. And in many instances employers offering retirement plans automatically enrolled workers into a default investment fund, essentially eliminating most financial decisions.”
Meanwhile, “when you’re investing in a non-retirement brokerage account, you have to choose which firm to use, which professional to work with, whether to get advice, which products to purchase and so on,” she said. “We wanted to find out about the attitudes, behaviors and knowledge of such investors.”
Some of the survey’s results weren’t terribly surprising: More than half of respondents said they use a financial professional. Meanwhile, younger investors were more likely to use “robo-advisors”—automated investment advice programs that work largely without intervention by human financial professionals—than older investors.
But some of the survey’s results are bound to raise a few eyebrows. Here are a few:
The oft-repeated conventional wisdom is that most investors are better off putting their money in mutual funds or exchange-traded funds, which tend to be less risky than individual stocks. While mutual funds were, indeed, fairly popular with the investors surveyed—64 percent reported owning shares of funds—individual stocks (excluding ETFs) were actually more popular. Nearly three-quarters of survey respondents said they owned individual stocks.
Why would stocks be more widely held? Walsh noted that income differences might explain the phenomenon. People with the most money under management, she said, held both stocks and mutual funds in equal measure—a result, possibly, of following the advice of investment professionals who recommended diversification through both stocks and mutual funds.
Those with portfolio values below $50,000, however, were significantly more likely to be invested in stocks than mutual funds. Retirement planning often helps investors learn about mutual funds, but Walsh noted the Foundation’s larger National Financial Capability Study found that people with lower income were less likely to have retirement accounts.
“They may not have had that introduction to mutual funds through retirement accounts,” she said.
In the digital age, you might assume that investors would prefer receiving disclosures about their various investments digitally rather than through bulky mailings…but you’d be wrong.
When investors were asked about their “preferred method of receiving disclosures,” nearly half—49 percent—said they’d prefer paper mailings, while just 27 percent said they preferred email and another 6 percent said they preferred other Internet-based options. Some 14 percent preferred to receive such information through in-person meetings with financial professionals.
Drill down further into the survey results, however, and things become a little less surprising. As it turns out, the preference is highly correlated to age. Investors 55 years and over showed the strongest preference for mailings, with 54 percent listing it as their top preference.
“It’s really the older group that tends to prefer paper and that was largest group that we surveyed,” Walsh said.
Younger people were less enthusiastic about paper, with 37 percent of 18-to-34 year-old investors showing a preference for hard-copy mailings. The rest of the younger crowd was largely split between email (28 percent) and in-person meetings (27 percent).
Among those who use investment professionals, 58 percent said that professional designations or certifications were very important. Yet just 23 percent of investors said they had used tools to confirm the qualifications of the financial professionals.
Walsh said that part of the reason investors aren’t doing their homework is that many simply don’t know that research tools are available—and free. Some such tools include FINRA’s Broker Check and the National Futures Association’s BASIC. FINRA also offers a professional designations tool, which can help you figure out what the various acronyms in a financial professional’s title mean.
Another possible reason is that investors may tend to have a great deal of trust in the professionals they’re already working with, namely those who have already identified themselves as experts.
“When someone says they’ve got a license or a credential, it conveys a sense of expertise that appeals to our natural bias to want to do business with people who hold credentials and seem to be experts,” Walsh said.
But it’s in investors’ best interest to always verify such claims. Unfortunately, the “source credibility” tactic is a common tactic employed by fraudsters. It involves trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience.
Investors with the largest portfolios—those with non-retirement holdings valued at more than $250,000—weren’t exactly feeling all that wealth burning a hole in their pockets. The richest investors, according to the survey, were the least likely to say they were willing to take substantial risks in hopes of gaining substantial returns. Just 9 percent said they would take such risks compared to 13 percent of those with portfolios worth less than $50,000.
Walsh suggested that two factors might be at play. For one thing, investors with more money tend to be older, meaning that they may adhere to the standard advice that they should invest more conservatively as they near retirement age.
But no matter what their age, investors with large portfolios may also be subject to the psychological principal of loss aversion: because they place a high value on what they already own, loss adverse investors often take pains to preserve those assets.
“They could be shunning risk to prevent losing what they worked so hard to accumulate,” Walsh said, “even though that means giving up any potential for gains.”
Previous FINRA Investor Education Foundation surveys have shown that individuals with non-retirement investment accounts tend to score higher on financial literacy surveys than individuals who only hold retirement accounts.
But the former group still isn’t as savvy as you might think. In a ten-question quiz focusing specifically on investing concepts, more than half of investors with non-retirement investment accounts—56 percent—answered just four or fewer questions correctly.
Their low scores, Walsh said, underscore the need for investor education and the FINRA Foundation’s mission. You can learn more about the Foundation’s efforts to engage and inform investors here.
Want to see how you would score on that investor literacy quiz? Find out by taking the quiz yourself here.