Speech by SEC Chairman:
Expanding the Promise of Opportunity and Security Through Saving and Investing
Chairman, U.S. Securities & Exchange Commission
Before the Consumer Federation of America, Washington, D.C.
December 3, 1998
Thank you very much for your warm welcome. I want to thank Katie for her generous introduction.
It is a great pleasure to be with you all today. This conference and more importantly, your efforts to better inform America's investors recognize one undeniable truth of our time: an era of institutional reliance is ending; an era of self-reliance has begun.
Today, more and more of us are taking responsibility for our own retirement needs. In the process, savings and investment habits have been dramatically transformed. More Americans invest in the stock market than ever before. More than one in three American families now invests in mutual funds that's more than 35 million households. Fund assets, at around $4.9 trillion, now exceed insured commercial bank deposits, which stand at $2.4 trillion.
Back when most of us saved at a bank, bought whole life insurance, or had a defined benefit plan, the responsibility for investment decisions was in someone else's hands. But that's no longer true. By entering the less certain world of our capital markets, more than 50 million American investors have assumed higher risk in the hope of higher reward.
This change did not happen overnight; indeed, it's been the better part of a century in the making. Wall Street was practically a private club until World War I. The war effort was credited by the first SEC Chairman with creating "a vast number of security holders. From a few hundred thousand before 1916 who held securities, more than 20 million became investors during the War, mostly in bonds."
As dramatic a change as this was, it involved government bonds, which are among the most secure investments. Americans by and large continued to shun the stock markets, and the Depression served to reinforce that risk-averse philosophy. For decade after decade, Americans were conservative savers focused on keeping money in federally insured bank accounts and maintaining life insurance.
This transformation in how and where Americans save and invest has enormous implications for our markets, our economy and our society. The plain truth is that there is an unacceptably wide gap between financial knowledge and financial responsibilities. If every investor in this country knew the fundamentals of saving and investing, we might be talking about a completely different subject today. But we know we don't have that luxury.
You know the challenges we face as well as I do. Tens of millions of Americans lack the basic saving and investing information they need to prepare for retirement or to meet other financial goals. More than half of all Americans have never even tried to figure how much money they'll need to save for retirement.
Too many people don't know how to assess the risks of different financial products. Too many people don't know how to choose an investment, or investment professional, or where to turn for help.
While 63 percent know the difference between a halfback and a quarterback, only 12 percent know the difference between a load and no-load mutual fund. Millions don't understand the purpose of diversification. Millions have market expectations that are totally out of line with historic averages.
Is there any doubt that we are in the midst of a financial literacy crisis? Earlier this year, the SEC, the Consumer Federation of America and a national coalition of government agencies, business groups, and other consumer organizations launched the Facts on Saving and Investing Campaign.
Our goal is to motivate Americans to get the facts they need to achieve financial security and avoid costly mistakes. Even if the government had all of the resources and power in the world to protect investors, I know there is no better way to prevent fraud and abuse than to educate investors.
But, this campaign is not only about improving investor knowledge. That's half the battle. Earlier, I stated that more Americans than ever are investing in the stock market. We know that we need to reach out to these new investors to help ensure they understand the relationship between risk and return and the benefits of a diversified portfolio. We know that this is a critical element of making suitable and sound investments at the right time in their lives.
But, what about the tens of millions of Americans who aren't investing in the stock market. What about the 90 percent of Americans who could contribute to an IRA, but don't? What about the one-third of Americans who could participate in a retirement plan, but fail to do so? Plainly put, what about those Americans who simply aren't saving?
Just last month, the Commerce Department reported that Americans personal savings rate for October was in negative territory minus 0.2%. I was saddened to learn that's the lowest it's been since the Great Depression.
I have cited a lot of stats. Few, however, trouble me more than this one which the CFA uncovered: sixty-five million American households will probably fail to realize one or more of their major life goals because they have not developed a basic financial plan. As you know, these Americans are some of our country's more vulnerable citizens.
Shouldn't it be incumbent upon every one of us to get across to all Americans from every income level that saving early and investing over the long-term is not only smart and sound, but increasingly necessary? Shouldn't a lower-wage worker hear the importance of saving and investing just as often as the recent college graduate? Shouldn't a worker in a textile factory know how much he or she needs to save to retire comfortably just as much as a worker in a high-tech company?
I realize I'm preaching to the choir. I know Senator Metzenbaum, Steve Brobeck and Barbara Roper have made the importance of saving and investing for all Americans a clear and unambiguous goal of the Consumer Federation of America. As we move forward, the efforts of consumer groups will play an indispensable role in educating more Americans about their retirement options.
One doesn't have to be an expert on the consumer-interest movement to recognize the influence it has had on our lives. Whether looking for a dependable car or a safe toy for our kids, the right health plan or the right foods, the consumer movement has made all of our lives better.
But, I have noticed that many consumer groups have traditionally stayed away from financial services issues. This is not all that surprising. In the past, our capital markets have been viewed as the sole province of the wealthy. But today, it has never been more clear that investing and saving for one's retirement is just as much a pocket book issue as buying a car.
I invite other consumer-interest groups to join the Facts on Saving and Investing Campaign in spreading the message about saving and investing. Your voice and those of other consumer groups can play a critical role in helping America's workers to take control of their financial futures. And, it has never been more important than now.
I believe that history will view the later part of this decade and the beginning of the next as a time when one of the greatest influx of new and inexperienced investors entered our markets. The proliferation of defined contribution plans and new technology, no doubt, will continue to bring many new investors into the market.
But, I fear that the range of investment and savings options may confuse and overwhelm many current as well as potential investors. Choosing among thousands of stocks, bonds, funds, and insurance products can be a daunting task.
Before we ask Americans to make informed investment decisions, they need to know three things what are their investment goals, when will they need the money, and how much risk can they afford. Only then can they choose investments that match their objectives.
Consider the influence of the Internet. Today, an average individual investor has more power and information available at his fingertips than ever before. Investors now have ready access to information that up until a few years ago was available only to securities professionals.
And, the amount of information available on the Internet is simply mind-boggling. Indeed, if you were to click through ten new financial Web sites a day, you could keep going for two and a half years before exhausting the possibilities. And those are just the sites posted in English.
Turn on the T.V. or the radio, open a newspaper and you will see advertisements for mutual funds each with their own 5-star rating and two, three, four or five-year performance histories. How many of you have seen advertisements for the growing number of Internet stock trading services? Turn to any of the financial channels and you will find a pundit talking about earnings forecasts for company X and breaking news about company Y.
Is any of us really surprised that many potential investors don't know where to begin?
During my years on Wall Street and at the Commission, I have learned one all-important lesson: ask questions. And if you are not satisfied or still confused, ask more questions. If every saver and investor in this country inquired, peppered, or even annoyed someone in the position to answer questions, I have no doubt that many more people out there would be meeting their financial goals and not lose their hard-earned dollars to fraud and abuse.
Together, we need to give people the tools to ask the right questions and get the right answers. How do we do it? I think there are three things we should do:
First, has anyone here heard about the importance of saving from either listening to the radio or watching T.V.? We've all heard the important warning that "friends don't let friends drive drunk." But we never hear that "friends don't let friends squander their financial future." We should hear that message on the radio and T.V.
Second, companies should take a greater role in teaching their workers about money. Employers that provide financial literacy programs are more than repaid through higher worker morale, greater productivity, and lower employee turnover.
Third, I applaud the efforts of our partners to expand financial literacy instruction in the schools. This spring, from April 25 to May 1st, many partners in the Facts on Saving and Investing Campaign will showcase their school programs. They will encourage partners to visit classrooms across the country to get students and young adults excited about saving for tomorrow. Let's not graduate one more generation that hasn't learned the financial facts of life.
Today, we stand at what may be a defining moment in American economic history. This may someday be described as the era of democratization of American finance. But, if the vast majority of investors are not informed and not educated, opportunity will lose out to ignorance.
We don't have a second to waste. The time to act is now. If you sense some urgency in my voice, it's for good reason. As some of you may know, a few weeks ago, I discussed the implications of investing Social Security in the stock market.
Clearly, we are all concerned about closing the knowledge gap that exists among investors today. But, it becomes even more of an imperative if we adopt individual accounts as part of Social Security reform. With individual accounts, more than 140 million American workers would be investing their retirement funds in securities.
Increased risk, through greater choice, holds the potential for greater returns. That's the upside of a system of individual accounts. The downside is that uninformed investors often won't be in a position to capture that potential. They risk making poor decisions, perhaps through ignorance or because they fall prey to fraudulent advice or misleading sales practices.
Whatever may happen, one thing is certain: the face of our financial system is changing and will continue to change. And, more and more of those changes are being driven to meet investor's needs. Take our Plain English initiative as an example.
Today, when a prospectus or other investor document is submitted to the SEC for comment, one of our foremost considerations is whether it accurately and effectively communicates with investors. In the last two years, through a cooperative effort with the industry, we've been successful in setting a new standard of clarity. The unmistakable trend in investor communication is away from impenetrable masses of linguistic underbrush in favor of economy and accessibility.
Years ago, the problem was a lack of information; today, it is a glut of information. Prospectuses have to work for investors, if they are to thrive in the new world of information. And, with the influx of new investors, we have to concentrate on connecting people with the great volume of information that's out there.
I see Plain English as an example of the type of positive change that comes from a wider circle of participation in our capital markets. If the number of investors had stayed relatively static over the last decade, consumer-driven interest to spur change like this would have been rare. And, companies would feel far less pressure to improve their communication with the investing public.
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Today, we have a unique opportunity before us: to help generations of Americans make the most of their God-given potential. Whether one person actively saves and invests or another fails to put away one penny, they both, fundamentally, share the same goals. Who would argue that every American worker doesn't want to retire comfortably? Who would argue that a parent doesn't want to be able to send their child to college? Who would argue that any person doesn't want to provide the health and security every family deserves? No one would.
We should always remember that most people don't invest just for the thrill of getting in on the hottest new IPO. Most people don't buy one stock in the morning and sell it in the afternoon. Most people aren't betting that bond yields will fall during a certain time period.
Most people invest and save for a very simple, but immeasurably important reason: to safeguard their retirement years, the futures of their children and their children's children.
America has always guaranteed opportunity for anybody willing to work for it. But, if people don't invest and save over the course of a lifetime, they deny themselves security and opportunity. That's a tragedy. Working together, I can't think of any more important mission than reaching out to every person in this great country and offering opportunity through education; empowerment through participation; and security through responsibility.
I look forward to joining with you all as we work towards these goals.
Thank you very much.