Wednesday, October 17, 2018

Rethinking Disclosure and Investor Education

SEC Commissioner Stein recently spoke at the Brookings Institution and called for more effective investor education as well as clearer and more effective disclosures.  One suggestion was to start designing curricula and providing investor education at much earlier ages.  She highlighted work done by  Nicole Iannarone and her students at Georgia State to put investor education information into nursery rhymes  My favorite is this bit from one about REITs set to My Little Teacup:

Non-traded REIT funds,

Have unique risks.

Illiquid value,

Harder to list.

Tempting for certain,

High dividend yields,

But higher up-front fees,

Could kill.

Admittedly, I might be unusual in my enthusiasm for poetry about the risks with non-traded REITs.  My attempts at crafting non-traded REIT rhymes veer toward unprintable, scatological rhymes.

Importantly, Commissioner Stein didn't just call for putting all investor protection hopes into Investor Ed.  She recognized that it can only do so much and that more effective and useful disclosures would make a big difference as well.  She also called for disclosures to make it clear to investors exactly who they are paying and how much they pay.  

Fee confusion remains widespread.  One recent survey found that about 43% of investors just don't know how much they pay.  This signals that our current system isn't working.  It's even worse for older cohorts.  A majority of investors in their sixties or seventies either don't know what they're paying or mistakenly believe that their financial adviser gives advice for free.

It may be difficult for commission-compensated salespeople to give good advice about non-traded REITs and similar products.  Josh Brown broke down what a transparent conversation about these products would look like on his blog:

With your portfolio size and risk tolerance I would recommend a $100,000 investment.  Given that amount let’s first go over the fees.  If you invest $100,000 I will be paid a commission of $7,000. My firm is going to get $1,500 – $2,000 in revenue share. My wholesaler, the salesman that works for the investment’s sponsor company, will get $1,000. He is a great guy, buys me dinner all of the time and takes me golfing. The sponsor company is going to get around $3,000 to pay for some of the costs they incurred in setting up the investment.  So all in on Day 1 there will be around $87,000 left over to actually invest.  I bet you are getting excited.

As the conversation around disclosure continues, we need to pay more attention to what disclosures actually increase understanding.

| Permalink


After years spent working at the SEC (Enforcement Branch Chief) and many years of research into retail investor behavior, I have come to question whether investor education, by itself, is enough to meaningfully move the needle for investor decision making or investor protection. For a recent paper (, I conducted a national survey of 1,000 retail investors re: their information-seeking behavior -- specifically, how they search for and use financial information when preparing to make investment decisions. The results of the survey suggest that investors trust whom they trust (principally, their own financial advisors), and that they rely upon those whom they trust for investment advice. They are not focused on the quality or content of the advice (or disclosures concerning the advice or the provider) -- they just decide whom they trust and get information and advice from that source. Sure, changes in disclosure or education requirements might move the needle a little for an investor here or there. But, disclosure/education-focused investor protection regimes have significant limits in the end, in my view.

Posted by: Christine Chung | Oct 18, 2018 10:45:29 AM

Thank you for sharing this piece! I share your deep skepticism about investor education and making disclosures to ordinary investors. Nothing we do now seems to be that useful.

My lean is to focus more on those trusted persons and keep a close eye on how they operate.

Posted by: Ben Edwards | Oct 18, 2018 10:52:23 AM

Post a comment