Investors who participated in a major study on financial literacy published last week spoke clearly: They want more information, more data, more disclosures.
Except when they want less. They want it formatted in tables and, also, not formatted in tables. They demand that the information be posted online, and will only read it in print.
With contradictory findings like these, the report, by the Securities and Exchange Commission, illustrates just how difficult it will be to make Americans smarter about finance: More disclosure doesn’t always mean better disclosure, and if you ask investors what they want, they don’t necessarily agree or even know how to answer.
Consider what happened when the SEC showed study participants mocked-up prospectuses (PDF) for three imaginary mutual funds, which were nicknamed Petunia, Hydrangea Bush, and Gardenia. All three look similar, with charts, graphs, and the like, but with one exception: The paperwork for Petunia and Hydrangea Bush was two pages long, while Gardenia used four pages. The study subjects recoiled at the longer document—rating the Gardenia fund prospectus harder to understand, less visually appealing, less user-friendly, and packed with too much legal jargon.
Hostility to lengthy paperwork is an obstacle for those who are calling on money managers to tell investors more about fee structures, strategies, conflicts of interest, and other important topics. In May, for example, Morningstar urged the SEC to require target-date funds (PDF) to show graphs illustrating how their products shift their holdings over time.
“There’s a bit of a diminishing value because the more that is disclosed to us, we may be less likely to pay attention to it,” one member of a Baltimore focus group told SEC researchers. “So somewhere they’ve got to decide the tipping point when people are just going to tune it out because it looks like it’s just too onerous.”
Confusing documents are just one of the reasons American investors consistently flunk financial literacy tests. Last week’s report, which was mandated by the 2010 Dodd-Frank financial overhaul law, painted an especially brutal picture. “Investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud,” SEC staff wrote. Women, African Americans, Hispanics, the elderly, and undereducated groups are worse than the average.
“Studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation,” they added, citing Library of Congress research. “Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds.”
“Look, financial things have become more complicated. And we do not explain it very well,” Muriel Siebert, a longtime advocate for financial education, said in an interview. “The funds have gotten more complicated than they were originally. The information is there, but [investors] don’t have the knowledge as to how to take it apart.”
No investor advocates want people to have access to less information, of course. What’s probably called for at this point, rather, is better information, formatted in ways that don’t cause eyes to glaze over. The 40 million-member American Association of Retired Persons (AARP) has called on the SEC to use “information design professionals” to recreate common paperwork so it can be understood by the average investor. The Consumer Federation of America made a similar push to “incorporate lessons from behavioral economics, graphic design, and disclosure design.”
The result, in theory, would be disclosure forms that are clearer, less imposing, and highlight important facts without overwhelming.
Otherwise, the views of some SEC focus group members will continue to be common. “Even though this information may be important,” one said of the current way disclosures are supplied, “it’s more information than I personally want to deal with.”