Dangerous games

6 September 2012 By Martin Hutchinson

An SEC study reveals financial illiteracy, but is short on ideas. Most everyone should learn about compounding, how debt differs from equity, and simple risks like inflation. Even then, modern markets are daunting. Maybe investors need a road test to move beyond basic products.

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The U.S. Securities and Exchange Commission on Aug. 30 released a study regarding financial literacy among investors, as required by Section 917 of the Dodd-Frank Act. The study found that U.S. investors lacked basic financial literacy: for example many do not understand the concepts of compound interest and inflation. The report also examined disclosures and concluded that investors felt disclosure of fees, disciplinary history, investment strategy and conflicts of interest was essential in relation to intermediaries, while investment product disclosure should be in summary form.

The SEC is considering allowing advertising of hedge funds and private equity offerings, as required by the JOBS Act passed earlier this year. Private offerings of unregistered debt and equity raised $895 billion in 2011 compared to $984 billion raised by registered offers, according to the SEC’s proposal on the topic.

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