Suitable education for suitable investments


Have you read the December 17, 2008 report on product suitability by the Joint Standing Committee on retail investor issues? Three questions were put to participants:

  1. What information about an investment does your advisor give you before and after you buy it? Is there any other information you would like?
  2. Should specific investment products be prohibited from sale to the public, or should all products be available to investors and investors be allowed to make their own choice?
  3. Should regulators focus on regulating specific products or on regulating how products are sold and distributed?

It’s a great idea to reach out to retail investors to get their feedback and I hope that more people participate in future consultations. It seems that the focus of the report is how can regulation help ensure that investors are presented with suitable investments.

There is no doubt that regulation is necessary to protect investors. However, as with other important social issues such as recycling and drunk driving, change requires both regulation and education. As investor education is my line of work, and the topic of this blog, I kept approaching the report from the context of how can education help investors decide if an investment is suitable.

Here’s a summary of the questions and ideas that came to me as I read the report:

Investment information Having the right information about an investment is key to ensuring it’s suitable for your needs. If you know what information you want, are you getting it? If not, why not?

Would interviews with advisors about their investment review processes and about how to best get answers to your questions help? How about step-by-step tutorials on due diligence, background checks, and how to read investment documents such as annual reports?

If you’re unsure what information you want, then where do you look for help? Does the information we provide on particular investments such as mutual funds or principal protected notes (PPNs) provide a good starting point for such products?

Back to basics, but in a different way Perhaps we need to delve deeper into the basic concept of suitability. Should we develop more material or tools to show you what suitability really means to you and how you can apply it? How about a program or application to help you better understand and apply the concepts of investment objectives and risk tolerance?

An investing step you can take now As regulation and education evolve to address investor’s needs, remember there is one action you can take right now to better protect yourself—Don’t buy an investment unless you truly understand how it works. Insist that your advisor provides you with investments you understand and that fit your investment profile.

Making time to invest right If you think you don’t have time to learn about investing or to review each investment opportunity, you might want to look at how you allocate your time. Dale summed it up nicely in his comment to Affinity at the heart of Madoff mayhem:

It amazes me that people can spend days pouring over a TV purchase, agonizing over every detail and grinding for a $100 savings, yet throw $20,000 – $30,000 into stocks or mutual funds on a quick phone call.

Also, you can be sure that the time and energy you would have to spend on trying to make up for losses due to an unsuitable investment would be much more than the extra time you need to check it out before you invest.

Thoughts? Suggestions? Questions? Leave a comment.