May 8, 2013
It's about time.
Five years have passed since the financial crisis struck. And only now do Wall Street executives seem to be gaining awareness that many potential clients have lost trust in them and the stock market, and have been voting with their feet.
You might have thought this would have dawned on Wall Street years ago, as millions of Americans lost jobs, homes and retirement savings, then complained that taxpayers gave Wall Street a $700 billion bailout while no one went to jail. It didn't help that when the stock market was plunging in 2008, some brokers and advisers hid instead of taking calls from clients.
Yet it took until this year for the Securities Industry and Financial Markets Association to devote a conference to the bitterness left behind.
"What did we do to impact trust and confidence?" asked Merrill Lynch Wealth Management's head John Thiel from the stage of the association's national wealth management conference in Chicago. His answer to the audience of financial advisers was: "We didn't do much to help ourselves. We have to get busy."
Until this conference, every time I've asked Wall Street executives whether they were concerned, they insisted that individuals would regain confidence once the stock market started to climb. That's what NYSE Euronext Chief Operating Officer Larry Leibowitz told me last summer, after traders at a Securities Traders Association conference begged him to start a public relations campaign to bring individuals back into the stock market and try to defuse regulatory efforts.
Now the stock market is at a record high, after climbing about 140 percent since the depths of 2009, but many individuals continue to shun stocks and Wall Street firms. They have sat out this rally, feeling disenfranchised and not trusting Wall Street. Their money has been flowing into bonds, leaving institutional investors to enjoy much of the fruits of the current rally.
From October 2008 to July 2012, people pulled $242.3 billion out of U.S. equity funds. They have not returned, even as stocks were climbing, except for a period of a few weeks early in the year, according to several sources, including the Investment Company Institute.
Since 2007, the share of individual investment clients seeking help from Wall Street firms has dipped to 41 percent from 48 percent, said Scott Smith, director of Cerulli Associates. A growing number have turned to independent advisers, free of major Wall Street firms, or are satisfied to handle money on their own at discounters such as Fidelity and Schwab, which provide a minimum level of advice.
"Investors have little belief that provider firms put investors' interests first," he said.
Gallup's most recent poll on trust showed banks at the lowest level recorded, with only 21 percent of people expressing confidence in them. That is about half of where the institutions stood before the financial crisis.
Thiel walked his audience through the reasons why. It wasn't just the financial crisis, he said. It dated to 2001, he said, when Wall Street analysts were touting Internet company stocks to the public while telling peers within their companies that those very stocks were garbage. Then came other scandals, and the financial crisis, and the Bernie Madoff scandal, the MF Global scandal, and large Wall Street firms manipulating Libor.
Confidence in the system has been hurt by government as well as Wall Street, said Jeff Connaughton, former chief of staff to former Sen. Ted Kaufman, D-Del., and the author of "The Payoff: Why Wall Street Always Wins." No one knows now "if my broker is on my side, or if I am up against the sharks," he said, because neither Wall Street nor the government has been "singling out the bad apples."
Financial firms, he added, "have been buying up influence in Washington to keep regulators from doing their jobs."
Yet, despite the list of offenses that Thiel said have undermined confidence, he didn't take his peers at the SIFMA conference as far as many individuals would like to see. When I mentioned that readers of my column have said they want to see Wall Street executives go to jail for their role in the financial crisis and want to see Wall Street stop fighting large bank regulation, Thiel simply responded that Wall Street wasn't the only one to blame for the crisis.
His solution for rebuilding trust, he said, is for individual advisers to provide good service to individual clients.
Perhaps a more satisfying response to individuals seeking accountability was offered at the conference by Ronald Kruszewski, chairman of Stifel Nicolaus & Co.
He told the audience that advisers will not be able to rebuild trust unless Wall Street companies behave themselves at all levels — in other words, the area of the firms that created and peddled toxic mortgage securities as well as the area that serves individual investors.
"As a group you need to demand your firms change," he told advisers. "Trust between clients and the firm you work for is quite low. What needs to be done? ... There needs to be a culture where you don't lie and steal."
He urged advisers to insist that high-frequency trading be regulated and that clients be protected from risky structured products they don't understand.
He said the industry had to rebuild trust "so we don't lose a generation of investors" and so the economy is strengthened by capital flowing into businesses from individuals investing money.
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