Investor Perceptions And Preferences Toward Selected Stock . - AARP

II. INTRODUCTIONIn recent years, stock market investors have weathered a sluggish economy, the steep marketdeclines prompted by the September 11th terrorist attacks, trade deficits, and reports of numerousscandals ranging from illegal corporate accounting practices to insider trading. According to ananalysis of the Federal Reserve Board’s 1998 and 2001 Surveys of Consumer Finances, the stockmarket declines of 2000 and 2001 reversed gains posted earlier, and by the end of 2001, mostmajor indexes had nearly returned to their 1998 levels. 1 Moreover, in a survey conducted byAARP in December 2002, three in four investors between the ages of 50 and 70 reported losingmoney in stocks during the preceding two years, and the majority of those who lost moneyindicated that they had adjusted their work plans, lifestyles, or expectations of retirement as aresult of their losses.2However, the proportion of families that own corporate equities either directly or indirectly (suchas through mutual funds or retirement accounts) rose from 1998 to 2001. By 2001, theproportion surpassed 50 percent. The growth in the value of equity holdings helped increasefinancial assets as a share of total family assets despite a decline in the overall stock market thatbegin in the second half of 2000.Today’s investor participates in an increasingly complicated world that co-mingles personalfinance with the factors and forces of global capital markets. Many individuals own stocksthrough more than one method. The four primary means by which individuals may own stocksare as follows: Directly own shares in publicly traded companies; Own shares in equity mutual funds outside of retirement saving plans and pensionaccounts; Own equity through self-directed retirement plans such as IRAs or Keogh plans; Own equity through corporate retirement savings plans such as defined contributionplans.As stock ownership becomes more commonplace among U.S. households, this most recentsurvey of stock owners was conducted to examine investor perceptions of selected securitiesindustry practices, the stock market, and financial services professionals in light of thepreviously mentioned challenges of the last few years. This survey focuses on investors ages 50and older and their valuation of investor protection first principles and investment prioritiesduring a period of market turbulence and reform.1See: Aizcorbe, Kennickell & Moore, “Recent Changes in U.S. Family Finances,” Federal Reserve Bulletin,January 2003.2See: Brown, “Impact of Stock Market Decline On 50-70 Year Old Investors,” AARP, 2002.6

Methodology OverviewKnowledge Networks, a research firm based in California, administered this survey using itsweb-enabled panel of people who have agreed to participate in surveys. This panel is designedto be representative of the U.S. population and was built by providing Internet devices andInternet service connections to people who have agreed to serve on the online panel. Byproviding Internet access to willing participants, Knowledge Networks allows individuals whowould otherwise have no access to the Internet to participate in online research.Conducted from February 13th to February 20th, the survey was fielded to panel members whomet each of the following criteria: (i) are age 50 or older, (ii) own stocks, either as individualstocks or in mutual funds; and (iii) have primary or joint responsibility for making householdfinancial investment decisions. A total of 1,917 households participated in the survey.The survey was conducted online due to the need to collect opinions about fairly complex issuesin a timely manner. For example, concepts, such as the tradeoff between best available priceand transaction speed, would have been too complex to present over the telephone, and a mailsurvey would not have been possible within the short timeframe.7

III. DETAILED FINDINGSA. BEST AVAILABLE PRICE VS. SPEEDWhen presented with two opposing views related to the importance of obtaining the bestavailable stock price versus the importance of other issues such as speed of transaction,approximately two-thirds (66%) of respondents indicated that they agreed with the view statingthat best available price should be the top priority when conducting transactions.Best Available Price vs. Speed(n 1,917)View A: Best available price shouldbe top priority.View B: Important to balance need forprice with speed and other issues.Refused to answer66%31%3%Certain individuals, such as those who conduct fewer transactions per year, women, those whoare older, those living outside of the West census region, those with lower incomes, and thosewith less education were more likely to feel that best available price should be the top priority.Specifically, the following significant differences existed within subgroups:Differences Based on Stock Ownership and Investment Behaviors Investors who had conducted no mutual fund transactions, other than automatictransactions, within the past 12 months, were more likely (70%) than those who hadconducted at least three mutual fund transactions (59%) to agree with View A (bestprice). Individuals who had conducted only one or two individual stock transactions, other thanautomatic transactions, within the past 12 months, were more likely (72%) than thosewho had conducted at least three individual stock transactions (62%) to agree with ViewA (best price). Individuals who own stocks only in retirement investments were more likely (74%) thanthose who own stocks outside of retirement investments (66%) to agree with View A(best price).Likelihood to agree with View A (best price) did not vary based on whether a respondent ownedstocks as individual stocks or in mutual funds.Differences Based on Demographics Women were more likely (75%) than men (62%) to agree with View A (best price). Respondents ages 65 and older were more likely (71%) than individuals ages 50 to 64(66%) to agree with View A.8

Investors with no formal education beyond high school were more likely (74%) thanthose with at least some college education (65%) to agree with View A.Respondents with annual household incomes below 50,000 were more likely (71%) thanthose with incomes of 75,000 or more (61%) to agree with View A.Respondents in the Northeast, Midwest, and South census regions were more likely(69%) than those in the West census region (59%) to agree with View A.Likelihood to agree with View A (best price) did not vary based on any of the other demographicvariables tested, including race, employment status, and marital status.1. Strength of AgreementWhen asked how strongly they agreed with their selection, close to three in four (74%)respondents indicated that they somewhat agreed. Approximately one in four (26%) indicatedthat they strongly agreed. Supporters of View A (best price) and supporters of View B (speedand other issues) were equally likely to indicate that they strongly agreed with their respectiveviewpoints. Specifically, among View A supporters, 74 percent indicated that they somewhatagreed with View A, while only 26 percent indicated that they strongly agreed. Similarly,among View B supporters, 74 percent indicated that they somewhat agreed with View B, whileonly 26 percent strongly agreed with View B.Certain individuals, including those who own stocks both individually and in mutual funds, thosewho conduct more transactions per year, those with more formal education, and those withhigher household incomes are more likely than others to feel strongly about this matter.Specifically, the following significant differences existed within subgroups:Differences Based on Stock Ownership and Investment Behaviors Investors who own stocks both individually and in mutual funds were more likely (31%)than those who hold stocks only in mutual funds (23%) to strongly agree with one of theviews. Individuals who had conducted at least three mutual fund transactions, other thanautomatic transactions, within the past 12 months were more likely (34%) than those whohad conducted no such transactions (24%) to strongly agree with one of the views. Investors who had conducted at least one individual stock transaction, other thanautomatic transactions, within the past 12 months were more likely (34%) than those whohad conducted no such transactions (23%) to strongly agree with one of the views.Likelihood to strongly agree with one of the views did not vary based on whether a respondentowned stocks outside of retirement accounts.Differences Based on Demographics Investors who have at least some post-graduate education were more likely (32%) thanthose with no formal education beyond high school (22%) to strongly agree with one ofthe views.9

Investors with household incomes of at least 75,000 were more likely (31%) than thosewith household incomes between 25,000 and 50,000 (23%) to strongly agree with oneof the views.Likelihood to strongly agree with either view did not vary based on any of the otherdemographic variables tested, including the following: Gender Age Race Employment status Marital status Census region2. When Price Would Not be the Top Priority for “View A” SupportersWhen those respondents who selected View A (best price) were asked if there were anycircumstances under which best available price would not be their highest priority, almost half(48%) said that best available price would not be their top priority if obtaining the best pricemeant that they would have to pay high fees. Another 41 percent pointed to the need to conducttransactions quickly. Close to one in six (17%) reported that best available price would alwaysbe their highest priority.When Price Would Not Be the Top Priority for “View A” Supporters(n 1,274)48%If getting the best available price meant I would have to pay high fees41%If I needed to buy or sell shares quickly11%If I wanted to complete the transaction on the Internet rather than gothrough a stockbroker2%Other (specify)17%Under no circumstancesQ8. “Under which, if any, circumstances would getting the best available stock price not be yourhighest priority?” Base: Respondents who agreed that best available price should be top priority( “View A” on questionnaire).High FeesOf those respondents who selected View A (best price), those who were more likely than othersto feel that best available price would be less important if the best price implied high feesincluded those who own stocks in mutual funds, those who are employed, those who areyounger, those with more education, those with higher incomes, and those who have never beenmarried. The significant differences within these subgroups are further described below.Differences Based on Stock Ownership and Investment BehaviorsView A (best price) supporters who own stocks in mutual funds were more likely (56%) thanView A supporters who own only individual stocks (38%) to indicate that obtaining the bestprice would be less important if obtaining the best price implied “high fees.”10

Likelihood to indicate that high fees would reduce the importance of obtaining the best price didnot vary based on any of the other stock ownership and investment behavior variables tested,including the following: Whether a respondent owned stocks outside of retirement accounts Number of mutual fund transactions conducted within the past year Number of individual stock transactions conducted within the past yearDifferences Based on DemographicsThe following View A (best price) supporters were more likely than other View A supporters toindicate that high fees would reduce the importance of obtaining the best price: View A supporters who are employed (54%), as compared to those who are retired (42%) View A supporters between the ages of 50 and 64 (53%), as compared to those ages 65and older (41%) View A supporters who have at least a 4-year college degree (62%), as compared to thosewith less formal education (40%) View A supporters who have a household income of at least 25,000 (51%), as comparedto those with a household income of less than 25,000 (35%) View A supporters who have never been married (70%), as compared to those who aremarried, separated, divorced, or widowed (46%)Likelihood to indicate that high fees would reduce the importance of obtaining the best price didnot vary based on any of the other demographic variables tested, including gender, race, orcensus region.Need to Sell Shares QuicklyOf those respondents who selected View A (best price), those who felt that best price would nolonger be their top priority if they needed to sell shares quickly were more likely to beindividuals who own stocks outside of mutual funds, conduct more transactions, are retired, areages 65 or older, or are widowed. The significant differences within these subgroups areexplained below.Differences Based on Stock Ownership and Investment BehaviorsThe following View A (best price) supporters were more likely than other View A supporters toindicate that best price would be less important if they needed to sell shares quickly: View A supporters who own stocks only as individual stocks (45%), as compared toView A supporters who own stocks only in mutual funds (33%) View A supporters who had conducted one or two transactions of individual stock withinthe past year (54%), as compared to View A supporters who had conducted notransactions of individual stock within the past year (41%)Likelihood to cite the need to sell shares quickly did not vary based on whether a respondentowns stock outside of retirement accounts or based on number of mutual fund transactionsconducted within the past year.11

Differences Based on DemographicsView A (best price) supporters who are ages 65 or older were more likely (46%) than View Asupporters who are between the ages of 50 and 64 (37%) to indicate that the need to sell sharesquickly would reduce the importance of obtaining the best price. Others who were more likelyto feel this way included the following: View A supporters who are retired (45%), as compared to those who are not working(33%) View A supporters who are widowed (49%), as compared to those who have never beenmarried (32%) View A supporters who have household incomes between 25,000 and 50,000 (46%), ascompared to those with household incomes of 75,000 or higher (36%)Likelihood to cite the “need to sell shares quickly” did not vary based on any of the otherdemographic variables tested, including gender, education, race, and census region.Completing Transactions Through the InternetThe percentage of View A (best price) supporters who indicated that best price would no longerbe their top priority if they were completing a transaction on the Internet varied little acrosssubgroups. Only View A supporters with lower incomes or those living in the West censusregion were more likely than others to indicate that completing a transaction over the Internetwould reduce the importance of best price. The significant differences are further explainedbelow.Differences Based on Stock Ownership and Investment BehaviorsNone. (There were no significant differences based on any of the stock ownership andinvestment behavior variables examined, including ownership of stocks outside of retirementaccounts, ownership of individual stocks or mutual funds, and number of transactions conductedwithin the past year.)Differences Based on DemographicsView A (best price) supporters who have household incomes below 25,000 were more likely(19%) than those with incomes higher than 25,000 (9%) to indicate that completing atransaction over the Internet would reduce the importance of price. Others who were more likelyto feel this way included View A supporters in the West census region (14%) as compared tothose in the Northeast census region (9%).Likelihood to indicate that completing a transaction over the Internet would reduce theimportance of price did not vary based on any of the other demographic variables examined,including gender, age, education, marital status, or race.Under No CircumstancesCertain View A (best price) supporters, such as those who own stocks only as individual stocks,those who conducted no individual stock transactions within the past year, those who are retired,12

and those with less formal education were more likely than other View A supporters to say thatbest price would always be their top priority. Specifically, the significant differences withinsubgroups are outlined below.Differences Based on Stock Ownership and Investment BehaviorsThe following View A (best price) supporters were more likely than other View A supporters tofeel that best price would always be their top priority: View A supporters who own stocks only as individual stocks (20%), as compared toView A supporters who own stocks in mutual funds (14%) View A supporters who had conducted no individual stock transactions within the pastyear (21%), as compared to those who had conducted one or two individual stocktransactions within the past year (10%)A respondent’s likelihood to feel that best price would always be his or her top priority did notvary based on whether the respondent owned stocks outside of retirement accounts or based onnumber of mutual fund transactions conducted within the past year.Differences Based on DemographicsView A (best price) supporters who do not have a four-year college degree (20%) were morelikely than View A supporters who have either a four-year college degree or at least some postgraduate education (11%) to feel that best price would always be their top priority.A respondent’s likelihood to feel that best price would always be his or her top priority did notvary based on gender, age, income, marital status, race, or census region.3. Notification from BrokerOf all respondents, more than four in five (86%) either strongly or somewhat agreed that theirstock broker or mutual fund manager should notify them before completing a transaction inwhich best available price is not sought. Specifically, the majority (57%) of respondentsstrongly agreed that they should be notified if best available price is not sought, and close tothree in ten (29%) somewhat agreed.“If my stock broker or mutual fund firm buys or sells stock without seeking thebest available price, they should notify me before they complete the transaction.”(n 1,917)57%Strongly agree29%Somewhat agree10%Somewhat disagree3%Strongly disagree2%REFUSEDQ9. “Please indicate the extent to which you agree or disagree with the following statement.”13

Differences Based on Stock Ownership and Investment BehaviorsThose who were more likely than others to strongly agree that they should be notified if bestprice is not sought include investors who own individual stocks, those who conduct individualstock transactions other than automatic transactions, and those who own stocks outside ofretirement accounts. Specifically, the following investors were more likely than theircounterparts to str

Concerns and Worries About the Stock Market Fear of losing money (63%), lack of ethics (61%), and general concerns about the state of the economy (55%) top the list of respondent concerns about the stock market. More than half of respondents selected these items when asked to select from a list of eight possible concerns. In