A joint study by the FINRA Investor Education Foundation and the Stanford Initiative for Financial Decision-Making reveals that only 18 percent of American retail investors demonstrate advanced investment literacy, with risk-related knowledge gaps directly tied to greater fraud exposure, weaker retirement savings behavior and higher rates of costly credit card debt.
The research, titled "What Separates Sophisticated Investors? Risk Literacy and Investment Decision-Making," draws on 2,861 respondents from the FINRA Foundation's 2024 National Financial Capability Study who hold investments outside of workplace retirement accounts. It was published October 5, 2026.
Using Item Response Theory - a statistical technique applied to 13 investment knowledge questions - the authors classified investors into three groups: 16 percent with low investment literacy, 66 percent with basic-only investment literacy, and 18 percent with advanced investment literacy.
The findings arrive during World Investor Week (October 5–11, 2026) and carry direct implications for advisors navigating client conversations around risk, fraud prevention and financial education.
The study's central finding is that advanced investment literacy is not primarily about knowing more financial concepts. It is about understanding risk from multiple angles.
Six of the eight questions that define advanced literacy concern risk directly, covering interest rate risk on bonds, the mechanics of buying on margin, the amplifying effects of leverage, risk diversification in portfolios, option payoffs and priority of claims in a corporate bankruptcy.
Basic-only investors, by contrast, can identify a stock or a bond and understand interest and inflation but fall short on the risk concepts that define advanced knowledge. The authors say this creates a dangerous middle ground of investors who feel confident enough to act but lack the framework to evaluate what they are taking on.
Fifty-four percent of investors with basic-only investment literacy said they would invest in a hypothetical opportunity promising a guaranteed, risk-free 25 percent annual return every year for five years; more than investors with low investment literacy (49 percent) or advanced investment literacy (35 percent).
Advisors who have been following the broader pattern of investor fraud awareness gaps identified in earlier FINRA-RAND research will know this is a recurring theme of confidence outpacing actual understanding.
"This research underscores the importance of emphasizing risk-related concepts in investor education and elevating financial fraud recognition as a complementary subject," said Christine Kieffer, president of the FINRA Foundation. "The FINRA Foundation is dedicated to investing in this type of targeted, relevant investor education for all Americans, so that every investor is equipped to make sound decisions and protect themselves from fraud."
The study also maps how information-seeking behavior shifts across literacy levels, a finding with practical value for advisors thinking about how to reach less-sophisticated clients.
Nearly three-quarters of investors with low investment literacy rely on friends, family or colleagues when deciding what to invest in, compared with just over half of those with advanced investment literacy. The gap widens on social media: 43 percent of low-literacy investors follow recommendations from social media personalities, compared with just 13 percent of those with advanced literacy.
One pattern runs counter to the trend. Reliance on financial professionals was actually highest among investors with low investment literacy at 75 percent, and lowest among those with advanced literacy at 63 percent. The authors urge caution in interpreting this, noting that lower-literacy investors also tend to have fewer investable assets, and may interpret "financial professional" more broadly. For advisors, however, this suggests an existing channel (and responsibility) to move beyond portfolio management into substantive financial education.
The financial consequences of advanced risk knowledge go beyond fraud vulnerability.
After controlling for demographic differences including age, income, education and employment status, investors with advanced investment literacy were nine percentage points more likely to have calculated their retirement savings needs and eight percentage points more likely to carry three months of emergency savings, compared with low-literacy investors. They were also 15 percentage points less likely to report costly credit card behaviors such as carrying a balance or paying late fees.
Notably, investors with basic-only literacy showed no statistically significant improvement on any of these outcomes compared with those with low literacy. The financial benefits appear concentrated at the advanced tier, driven by risk comprehension, not just familiarity with investment basics.
The authors outline several recommendations for investor education, several of which translate directly to advisor practice. They argue that one-size-fits-all education is unlikely to be effective.
A short self-assessment administered before an educational program, they suggest, could route investors toward content that extends rather than repeats what they already know, building foundational concepts for low-literacy clients and risk-focused concepts for those with basic-only literacy.
The study also highlights that younger investors, lower-income investors and Black and Hispanic investors are disproportionately represented among those with low investment literacy. These same groups rely most heavily on informal channels for investment information. Given that FINRA has previously faced criticism for not sufficiently prioritizing individual investor protection in its 2026 oversight agenda, the new research reinforces the case for regulator and advisor action focused on these demographics.
Perhaps most practically, the authors urge that fraud recognition be taught as its own subject, not assumed to follow naturally from general financial education. The finding that basic-only investors were the most willing to invest in an obvious fraud scheme - more than even the lowest-literacy group - suggests that general financial confidence without specific fraud-awareness training may actually increase susceptibility rather than reduce it.
Andrea Sticha, research director at Stanford's Initiative for Financial Decision-Making, put it plainly: "Most of the investors we studied know the basics, but very few have developed the risk-related knowledge that defines advanced investment literacy. That gap is exactly why investment literacy deserves its own focus. Closing it means tailoring education to where an investor's knowledge actually stops, meeting them there with the right content and the right channel."
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