Many investors have little financial knowledge and are ill-prepared to manage their own finances, let alone make complex investment decisions, finds new research from the investor education arm of the U.S. Financial Industry Regulatory Authority (FINRA).
The FINRA Investor Education Foundation (FINRA Foundation) has reported that its research — which was conducted along with the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business — found that financial knowledge is “alarmingly low” among retail investors.
In particular, the FINRA Foundation found that the 15,000 investors they surveyed “had significant difficulty” answering questions about the concepts of asset pricing and risk diversification.
The research also noted that investors who only have accounts set up at their employer have notably weaker knowledge than investors who also invest on their own through private investment accounts.
For instance, only 32% of workplace-only investors could answer questions about basic financial concepts (numeracy, inflation and diversification) correctly, compared to 44% of more-active investors.
“Many investors, and especially those who are exposed to investment decisions solely through participation in an employer-sponsored retirement plan, lack financial literacy,” Annamaria Lusardi, academic director of GFLEC, said in a statement.
“This is a problem that cannot be overlooked. Our findings signal a great need for targeted financial education programs that raise financial knowledge, particularly in the workplace. Workplace education could help prepare employees for the sort of financial decision making that they are required to make,” she added.
“Fewer workers today have defined benefit pension plans and the rise of defined contribution plans… require an understanding of financial markets and basic personal finance that many investors lack,” said Gerri Walsh, president of the FINRA Foundation.