THE proliferation of financial products has given investors hundreds of complex and often confusing choices. Some of these products involve more risk, but almost all require more information. ``It's fine to take a larger risk to get a greater return, as long as you know what the risks are,'' says Robert Edwards, vice-president and director of education services at the American Association of Individual Investors (AAII). Pointing out these risks ``is what we are trying to do.''
The association is a Chicago-based nonprofit, educational corporation that uses in-house research and independent consultants to develop programs and services for individual investors.
While its emphasis is on information for individual investors, it does not try to work against financial brokers and advisers. ``The more everybody knows, the better for everyone,'' Mr. Edwards says. Financial professionals, he says, stand to benefit by having their clients well informed about investment matters; lawsuits over failed or disappointing investments, for example, are often due to inadequate information or poor communication.
Several brokers and financial planners have recommended AAII to their clients, Edwards claims. ``At least,'' he points out, knowledgeable investors ``can intelligently assess what their financial brokers are doing for them.''
AAII's explosive growth over the past few years has generally tracked the vigorous ascent of the stock market. Established in 1979, the organization had 8,000 members by 1981 and had grown to 98,000 by the end of last year. Declining interest rates over this period, combined with growing attention to business and investment news by the news media, have also helped.
The most visible part of the association's information service is the AAII Journal, mailed 10 times a year to members. It includes articles by the organization's staff and outside consultants. The January issue, for example, includes articles on what investors should know about the Standard & Poor's 500 composite stock index and a feature on a study showing that positive returns are earned in the stock market during the first half of each month.
The association also offers an annual guide to ``no load'' (no commission payment) mutual funds and a newsletter on computerized investing. Published every other month, it surveys computer aids that investors can use to conduct financial analysis.
There is also a home study curriculum that explains investment theory and provides practical applications for constructing and managing an investment portfolio. Concepts of investment, risk and return, investment alternatives, options and hedging, debt instruments, and mutual funds are some of the topics covered.
Local AAII chapters established in key cities around the country allow members to exchange ideas with other individual investors and hear from qualified speakers. These speakers can include mutual fund portfolio managers, stockbrokers, financial planners, university professors, or AAII staff members.
One challenge for the association is to maintain its independent position and perspective. Journal authors and seminar speakers from financial organizations such as mutual funds or insurance companies often have particular products or services to sell, but AAII officials say they try to have these representatives educate rather than advertise.
``We don't want them to use us as a forum for selling their products,'' Edwards says.
The AAII Journal explicitly states that its editorial policy discourages the promotion of specific investments or analysis techniques.
Nevertheless, there are some inherent biases simply because of the way the association does business, as its officials readily concede. There is, for example, the tendency of the association to stress ``fundamental analysis'' rather than ``technical analysis'' in its securities research work. Fundamental analysis of stocks focuses on company earnings growth, the riskiness of business operations, balance sheets, and income statements to determine equity value. Technical analyses, however, examine historic price and volume patterns.
Academia leans toward the former approach, Edwards says, and the association's use of university and college research underscores this tendency in AAII research.
Having more information does not mean AAII members avoid all brokers or fiancial advisers who charge commissions. A recent survey of association members found that one-third used only a full-service broker, one-third used just a discount broker, while a third used both. Of those who used both, the full-service broker was usually permitted to make a financial transaction if he initially recommended the investment.
Investors with the time, inclination, and energy to strike out on their own are likely to do better - in some cases considerably better - than investors relying on portfolio managers, association officials contend. The average return for AAII members in 1985 was 19 percent. This compares with a return of 18 percent for the Standard & Poor's 500 index and other market references.
While the difference is marginal, it can increase dramatically when management fees and commissions are deducted from market-calculated returns. Management fees typically run from percent to 2 percent, while commissions can go as high as 8.5 percent, says John Markese, AAII vice-president and director of research. Thus the spread in rates of return between investments handled by money managers and those controlled by individual investors can be substantial.
AAII membership is $48 a year and lifetime memberships are $425. For more information, write American Association of Individual Investors, 612 N. Michigan Ave., Suite 317, Chicago, IL 60611.