Public Policy Institute

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1 Public Policy Institute OLDER ONLINE INVESTORS: TRADING ACTIVITY, INFORMATION SOURCES, ONLINE TRADING EXPERIENCES, AND PRIVACY ISSUES Introduction As of January 1999, there were approximately 7 million online brokerage accounts open; by July 1999, there were approximately 10 million accounts. 1 Online investors have direct access to the market and market research. Such access enables investors to trade without consulting financial professionals. 2 The rapidly increasing number of investors who directly access the market has raised questions about the capacity and quality of online trading services, the risks to investors, and the privacy of personal information. This Data Digest reports the findings from a national survey designed to help policymakers and others better understand the trading experiences and concerns of older online investors. Methodology AARP s Research Group directed NFO Interactive Research to conduct a survey of online investors at least 45 years of age. The study was conducted from June 16 to July 3, A total of 995 online investors successfully completed the survey. 3 These older online investors were selected from 2,500 prescreened older households with an individual who had invested online within the prior 12 months. 4 Responding to an interactive online survey, older online investors were asked a series of questions regarding their online trading activities, referral and information sources, online trading experiences, and privacy concerns. Findings Online Trading Activity Length of experience. Over threefifths (62%) of older online investors have traded one year or less. Number of trades. Nearly one fifth (19%) of older online investors made no trades in the previous 6 months; 24 percent made more than 5 trades; and less than 1 percent of older online investors traded daily. Percent of trades online. Over onefourth (26%) of older online investors placed 100 percent of their trades online. Frequency of trading. Nearly onethird (32%) of online investors traded more often after beginning to trade online (Figure 1). 1 Office of New York State Attorney General. From Wall Street to Web Street. (November 22, 1999). 2 General Accounting Office. Online Trading. Better Investor Protection Information Needed on Brokers Web Sites. (May 2000). (GAO/GGD-00-43). 3 The margin of error is , with a confidence level of 95 percent. 4 The response rate was 40 percent. DATA DIGEST NUMBER 50 - PAGE 1

2 Figure 1: Frequency of Trading by Older Investors After Beginning to Invest Online About as 49% More 32% Less 19% Source: 2000 AARP Survey of Older Online Investors (n=995) Percentage of portfolio online. More than one in 10 older online investors (11%) reported that their entire portfolios were online. Reasons for starting to trade online. Older online investors reported to begin investing online because they 1) believed that it was cheaper than investing offline (41%); 2) explored websites (31%); 3) discussed online investing with a friend/colleague (25%); 4) read financial publications about online investing (13%); 5) saw a TV or newspaper advertisement (11%) and 6) were dissatisfied with their full-service broker (10%). Referral/Information Sources Information sources. Nearly 9 in 10 (87%) online investors reported that they always or usually seek information before trading online. Five of the 10 most frequently cited sources of information for older online investors were online sources: investment websites (63%); other websites (62%); online newsletters (27%); online bulletin boards (15%); and chat rooms (4%) (Figure 2). Figure 2: Information Sources Cited by Older Online Investors Who Seek Information Percent Invest Web Other Web Papers/Mags Fin Pubs Friends TV/Radio Online newsletters Broker/Fin Prof 15 Online Bull Boards (n= 969) Information from offline brokers. One-fourth (25%) of older online investors have never used the services of offline full-service brokers. Over one-third (37%) of they presently did not have fullservice brokers to make offline investments on their behalf. Online Trading Experiences Investor satisfaction. Two-thirds of they were very satisfied (39%) or somewhat satisfied (27%) with their online investing experience. Only 7 percent of older online investors were somewhat or very dissatisfied. Over one-fourth (27%) were neither satisfied nor dissatisfied. Decision to trade online. Respondents were asked about the factors they considered when deciding to trade online or offline (Figure 3). When they chose to trade online, the most important factors were: 1) lower fees (77%); 2) ease/convenience (71%); and 3) speed of transaction (61%). When respondents chose to trade offline, 4 Chat Rooms DATA DIGEST NUMBER 50 - PAGE 2

3 the most important factors were: 1) the need for professional advice (58%), and 2) the complexity (55%) of the transaction. Figure 4: Percentage of Older Online Investors Asked About Financial Goals by Online Broker Figure 3: Factors Older Online Investors Use to Decide Whether to Trade Online or Offline Availability of a Range of Investments Professional Advice Online Offline Respondents (%) Not a Factor Need No Need Complexity of Transaction Complex Not Complex Investment Risk Risky Not Risky Less Expensive /Lower Fees Feeling of Control Speed of Transaction Ease/Convenience Lack of Pressure from Broker/Advisor Amount of Money Involved in the Investment Feels Safer (n=466) Online inquiries about investor financial goals. Nearly one-fourth (24%) of older online investors reported that they have been asked about their financial goals by their online brokers (Figure 4). No 76% Yes 24% (n=995) Perceived risk. Nearly three-fourths (72%) of older online investors believe that trading online carries about the same level of risk as trading offline; 17 percent believe trading online has greater risk than trading offline. Unwise online trades. Fifteen percent of older online traders felt that they had made an unwise decision in the course of trading online that they would not have made trading offline. Of those reporting to have made such an unwise decision, reasons cited were: 1) made a rash/quick decision (21%); 2) did not do adequate research (18%); 3) the trade was too quick/easy (16%); and 4) did not ask a broker (10%). Online trading problems. Older online investors reported the following online trading problems within the 12 months prior to the survey: 1) difficulty in placing an order; 2) inability to access the broker s website; 3) excessive delays in processing orders; 4) inability to reach customer service; 5) inadequate customer service; and 6) excessive delays in updating account information (Figure 5). In addition, DATA DIGEST NUMBER 50 - PAGE 3

4 three price-related problems were reported. Figure 5: Problems Reported by Older Online Investors with Online Trading Problem Respondents (%) Difficulty Placing Order 55 Inability to Access Broker s Website 53 Excessive Delays in Processing Order 44 Inability to Reach Customer Service 34 Inadequate Customer Service 32 Excessive Delays in Updating Account Information Failure to Get the Price Investor Thought He/She was Getting Failure of Online Broker to Provide Best Price No/Limited Access to Real Time Quotes (n=130) Misleading online information. Over one in 10 (12%) older online investors reported receiving misleading or deceptive information online. Four percent of older online investors believed that they were inappropriately steered into purchasing a particular investment product online. Privacy Concerns Level of concern. Sixty percent of respondents were very concerned (24%) or somewhat concerned (36%) about their privacy. Disclosure of policies. Nearly half of either their broker did not disclose (11%), or they did not know if the broker disclosed (35%), its policies and practices regarding the collection and use of investor information. Disclosure of information. Online investors report that much information is disclosed to them. Yet, many older online investors have not been provided key information by their online brokers (Figure 6). For example, 45 percent of respondents reported that their online brokers had not informed them as to how investor information would be used. Figure 6: Information Disclosed by Online Brokers as Reported by Older Online Investors Online Investors Whose Online Broker Has Informed Investor About: Security of Personal Information During the Transaction Security of the Investor s Personal Information While Held by the Broker How and Where an Investor Can Submit Questions/Complaints Whether the Investor s Information is Shared with Others What Information the Broker Will/Will Not Disclose about the Investor to Other Businesses How the Investor May Verify the Accuracy of Investor's Information Respondents (%) How Investor Information Will Be Used 55 What Investor Information is Collected 53 (n= 995) Summary Overall, older online investors are satisfied with their online trading DATA DIGEST NUMBER 50 - PAGE 4

5 experiences. 5 The problems reported by older online investors are related to order placement, service, and account information and price. Older online investors are also concerned about the privacy of their personal information on the Internet. Many older investors who trade online do so without consulting with a financial professional, such as a broker or investment advisor. In fact, many older online investors have never used offline full-service brokers. Older online investors also rely often on the Internet for the research they conduct prior to trading online; nearly one-fourth of older investors are asked about their financial goals by their online brokers. Results from this study are important for consideration by policymakers in developing protections for online investors in such areas as disclosure, suitability, the definition of investment advisors, and privacy. investment advisors, both online and offline, meet high standards of professional competence and integrity; and require registration of online and offline investment advisors under the Investment Advisors Act (IAA); such registration should not be limited by the type of investment advice provided. Written by Sharon Hermanson Senior Policy Advisor Public Policy Institute September AARP Reprinting with permission only. AARP, 601 E Street, N.W., Washington, DC research.aarp.org To assist investors in making informed choices appropriate to their financial needs, regulation of investment products and services must: ensure that disclosures of information such as investment risk, fees and related costs, and use of personal information are comprehensive, accurate, and easily understood; ensure that persons holding themselves out to the public as 5 It is important to restate that this study examined only those older persons who traded investments online at least once in the 12 months prior to the study. The study does not represent the experiences of older investors who never traded online or stopped trading online. DATA DIGEST NUMBER 50 - PAGE 5