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Investors Who Know More Pay Lower Fees, Study Finds

By Michael S. Fischer

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What You Need to Know

  • The correlation did not hold for investors who merely rated their own investment knowledge highly.

Investors who know more — and not just think they do — pay lower fees, according to a report released Friday by the FINRA Investor Education Foundation.

The study investigates how investing knowledge, objectively measured and self-assessed, is associated with the amount of fees that investors report paying in non-retirement investment accounts. 

Researchers measured objective investing knowledge using answers to 10 multiple-choice questions about specific investment scenarios. They measured self-assessed investing knowledge by asking participants to rate their own investing knowledge on a scale of 1 to 7. 

Inside the Research

The study found that investors who correctly answered more investing knowledge questions reported paying lower fees. The mean investing knowledge score was 5.7 (out of 10) for investors who reported paying less than 0.5% in fees, compared with 3.65 for those who reported paying 4% or more. 

This association between objective knowledge and investment fees paid persisted even after researchers controlled for demographic characteristics, including gender, ethnicity, marital status, age, educational attainment, income, employment status, non-retirement account portfolio value and the survey year.

Investors who rated their investing knowledge as higher reported paying more in fees, according to the study. On average, those who said they pay less than 0.5% in investing fees rated their knowledge of investing as a 4.96 (out of 7). In comparison, investors who stated that they pay 2% to 3.9% in fees, on average, rated their investing knowledge as a 5.47. 

The report said that despite being comparatively weaker than the association between objective investing knowledge and investment fees paid, the connection between self-assessed knowledge and investment fees paid persisted after researchers controlled for a host of demographic characteristics.

“This new study gives us even more evidence that bolstering investing knowledge, while also helping investors understand the potential limits of their knowledge, is vital to improving investors’ outcomes,” FINRA Foundation’s president Gerri Walsh said in a statement. 

“As the financial landscape becomes more complex with product offerings and investment choices, it remains important for investors to understand the relationship between fees and returns.” 

The data used for the study came from pooled findings in the 2018 and 2021 National Financial Capabilities Study, resulting in a sample size of 4,827. The report said the sample was not representative of the general population, as it trends toward older, higher-educated adults with higher-than-average household incomes, which are characteristics of the investing population.

Michael S. Fischer

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