How can the financial service industry help restore confidence in the U.S. stock market? Regulators recommend a better explanation of risk.
A “true crisis of confidence” is discouraging many Americans from investing in the stock market, according to regulators who say financial professionals can make investors fell less vulnerable by doing a better job of explaining investment risk .
“Today’s markets are complex and moving faster than ever, and investors face a wide array of new and complicated products with features and risks they don’t always understand,” Richard Ketchum, chair of the Financial Industry Regulatory Authority, said in a speech at the agency’s annual conference today. “We realize investors are hesitant to return to this rapidly changing market.”
The recession, flash crash and financial fraud have had a “lasting effect on investors’ trust,” Ketchum said. More than 62 percent of high net worth investors surveyed in March by Spectrem’s Millionaire Corner say they feel angry over the economic events in the U.S. over the past five years, indicating that “the government and financial institutions failed consumers.” Thirty percent of the high net worth – individuals with investable assets of $5 million up to $25 million – indicate they are less confident in the stock market than in the past.
Financial professionals can help restore confidence in the stock market by marking sure investors have an adequate understanding of the risks posed by often complex investment products. “A good place to start is to acknowledge that the strategies that were appropriate for many investors a few years ago may no longer be appropriate today,” Ketchum said.
Near-zero interest rates have prompted investors to assume more risk through longer-duration and junk bonds, and complex, illiquid investments, such as private Real Estate Investment Trusts or REITs, Ketchum said. “We’re worried about investors taking on risks that they either don’t understand or cannot afford.”
Affluent investors worry more about risk than any other investment –selection criteria, according to our research. The concern is keeping many investors – particularly self-described conservative and less wealthy individuals – from increasing their exposure to the stock market.