Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 28, 1995 TAG: 9505270009
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: JOHN LEVIN
DATELINE: LENGTH: Medium
But this widow didn't know on which exchange her recently inherited shares are traded. She had no idea of the company's line of business. In fact, she wasn't real sure of its name.
This caller is what the investment industry euphemistically calls an "upsophisticated investor."
These are folks from whom some securities brokers willingly accept money, may offer a bit of arcane advice but provide little real understanding about what they've bought.
These are folks too embarrassed by their financial naivete to ask for the information they need. They fear a simple question either will be dismissed or answered in mind-numbing jargon.
These are folks the federal Securities and Exchange Commission now sees as its responsibility.
"Where once we looked out at investors and saw starched white shirts and pin-striped suits, we now see flannel shirts and denim jeans," said SEC Chairman Arthur Levitt.
"It's not unusual for a SEC official to give an hour speech and then take two hours of questions that investors were embarrassed to ask brokers."
Levitt made the comments this month to a meeting of newspaper and broadcast business editors. While the SEC's role as watchdog of U.S. financial markets has long included an element of consumer protection, Levitt's focus now is on the individual investor, who he called "the backbone of our markets."
"People have been taking their money out of savings accounts and putting it in mutual funds without understanding the risk,' he said. "Our aim is not to eliminate risk but to make sure people understand it before they invest."
And to do that means the information that mutual fund managers and companies send investors has to be written in language that can be understood by more than the lawyers and accountants who probably wrote it.
One proposal would allow companies to simplify their financial statements by eliminating footnotes that explain the results in often burdensome legalize. Also, seven mutual fund companies are experimenting with more readable formats.
Companies and funds would provide the footnotes to investors who request them but wouldn't send them to those who don't, Levitt said.
"By the end of this year, we'll know how to communicate with the public so they can avoid unpleasant surprises," he said.
But the SEC may be taking the wrong steps toward good motives.
"Sophisticated investors and analysts read the footnotes first; eliminating them is not an improvement for giving people information they need," said J. Tyler Pugh, senior vice president and manager of Wheat First Butcher Singer's Roanoke office.
A security broker's responsibility is to filter some of the fog of confusion and give financial advice along with selling stock, he said.
Pugh admitted brokers probably get fewer detailed questions from customers than they'd like. But inherent in the oft-asked "Do you think this is a good investment" is really a plea for information based on investment expertise, he said.
"It's like going to a physician," Pugh said. "You don't need all his medical background if you trust the doctor and have confidence in the advice."
Mary Anne McElmurry, an accountant with Brown, Edwards & Co. of Roanoke, sees the results of investments made without enough information about the tax consequences.
Her clients run "the gamut from sweet but senile little old ladies to very sophisticated investors" and she's concluded that many people have little understanding of the fees and risks associated with investments, especially of mutual funds.
"Before the 1970s, the only people in the market were those in the know," she said. "Now with mutual funds and people seeing returns on certificates of deposit sliding down ... there's a fever to get in."
"Mutual fund investors have been operating in a darkened market," Levitt said. "Many don't know what they've been buying."
by CNB