Half of Investors Do Not Recognize Warning Signs of Fraud; Findings Released in Light of World Investor Week
WASHINGTON–(BUSINESS WIRE)–In light of World Investor Week (Oct. 6-12), the FINRA Investor Education Foundation (FINRA Foundation) released today first-look findings from its forthcoming report, “Investors in the United States: A Report of the National Financial Capability Study,” which will be published in December. The report provides an in-depth exploration of the attitudes, behaviors, knowledge and experiences of retail investors in the United States.
As part of the study, researchers asked a sample of investors across the United States a question about investment fraud:
If you heard about an investment opportunity that promises a guaranteed, risk-free 25% annual return every year for the next 5 years, would you invest in it?
- Yes
- No
- Don’t know
Despite describing guaranteed and very high investment returns, two hallmarks of investment fraud, half of respondents (50%) indicated they would invest in the hypothetical offer, indicating a lack of recognition about the warning signs of fraud. Investors who are younger, less experienced and less knowledgeable about investing are even more likely to say they would invest in the “opportunity.” The data further reveals that investors who engage with investments that can carry greater risk, such as cryptocurrencies and meme stocks, as well as those who rely on social media for financial information, are particularly open to a hypothetical investment that promises much more than it can deliver.
Notably, the differences by income in the proportion of investors willing to invest in the hypothetical offer were less pronounced, with only four percentage-points separating those earning under $50,000 and those earning $100,000 or more.
“These findings reveal that a concerning number of investors might be vulnerable to investment fraud,” said Gerri Walsh, President of the FINRA Foundation. “All investments involve some level of risk, and investors must understand their own risk tolerance to make informed decisions. At the same time, investors must learn to spot the red flags of investment fraud—including the promise of little to no risk with unusually high returns,” she said.
The full report, part of the FINRA Foundation’s triennial National Financial Capability Study, will provide comprehensive insights to help financial professionals, educators, regulators and others serve and protect investors of all backgrounds and experience levels.
Additional findings:
- Investing knowledge: Investors with high investing knowledge were less likely to invest in the hypothetical opportunity than those with low investing knowledge. Thirty-six percent of those with high investing knowledge report they would invest, compared to 49% of those with low investing knowledge.
- Crypto and meme stock investors: More crypto investors report they would invest in this “opportunity” than non-crypto investors (65% vs. 44%, respectively), while those who have purchased a meme-stock or viral investment are even more likely to look favorably upon the hypothetical investment than those who have not purchased a meme stock (77% vs. 45%, respectively).
- Influenced by social media personalities: Almost three-quarters (72%) of study respondents who at least sometimes make investing decisions based on the advice of a social media personality said they would invest in the hypothetical opportunity. The survey found those relying on social media would be much more likely to invest than those who don’t (69% vs. 42%, respectively).
A version of this press release, which includes charts, is available here.
About the National Financial Capability Study
In 2009, the FINRA Investor Education Foundation launched the first national study of financial capability of adults in the United States. Since its start, the National Financial Capability Study has provided data on multiple indicators of capability—including financial behaviors, attitudes and knowledge.
National Financial Capability Study survey data is collected every three years. The Investor Survey is an online survey of 2,861 U.S. adults who have investments outside of retirement accounts. The data provides detailed information on a wide range of investing topics, such as attitudes towards risk and investing, investor knowledge, and reliance on so-called “finfluencers.”
More information about the National Financial Capability Study—including reports, data and interactive data visualizations—can be found at www.finrafoundation.org/nfcs.
About the FINRA Investor Education Foundation
The FINRA Investor Education Foundation supports innovative research and educational projects that empower Americans with the knowledge, skills and tools to make sound financial decisions throughout their lives. For more information about FINRA Foundation research and education initiatives, visit www.finrafoundation.org.
About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. FINRA regulates one critical part of the securities industry—member brokerage firms doing business in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
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