NEW YORK (Reuters) – Top wealth chiefs at Bank of America Corp’s Merrill Lynch and Wells Fargo & Co say many retail investors are still very hesitant about getting back into equities and are urging advisers at their firms to help reignite client confidence.
Even as stocks soared to new highs in 2013, memories of the 2008 financial crisis and lingering distrust have kept many retail investors from jumping back into the stock market with the vigor they had pre-crisis, the brokerage executives said ahead of the Reuters Global Wealth Management Summit, which starts on Monday.
“There’s still a pretty vivid memory of what happened in 2008, 2009, and the impact to people’s portfolios,” said John Thiel, head of Merrill Lynch Wealth Management, in an interview at his New York office.
U.S. stocks have taken a roller coaster ride over the past five or so years. The S&P 500 index hit its last peak in October 2007 at around 1570, then more than halved to hit its low in March 2009 before finally clawing all the way back this year.
Investors scared by the volatility often retreated to low-yielding fixed income instruments.
Investors are behaving “like most human beings would with the memory of what can happen and isn’t in their favour,” Thiel said.
Merrill, owned by Bank of America, and Wells Fargo Advisors, the brokerage unit owned by Wells Fargo & Co, are among the largest U.S. brokerages, with more than $1 trillion in client assets each. Merrill counts roughly 14,500 advisers among its brokerage force, while Wells has just over 15,000 advisers – those who manage the wealth of millions of mum-and-pop investors across the United States.
Thiel, who started his own career as an adviser with Merrill in 1989 in Tampa, Florida, said among the biggest hurdles for the industry going forward are to help clients regain their confidence and reorient their focus toward goal-driven wealth management. Many of these goals – such as socking enough money away for retirement – cannot be reached by parking money in low-yielding investments.
Equities performed very well for almost 20 years, but have underperformed for 10 years, said Thiel. “You have to change all of that memory,” he said. “When you talk about changing people, that’s hard.”
MONEY STILL ON THE SIDELINES
While there was some movement back into stocks in early 2013, after lawmakers in Washington avoided the worst of potentially growth-killing simultaneous tax increases and spending cuts, many retail investors remain sidelined.
From January through early March, David Carroll, head of Wealth, Brokerage and Retirement at Wells Fargo, watched clients pour more money into fixed-income than equities. And that is a source of frustration, even as interest rates are nudging up.
“Every day, every week, every month that passes, people’s portfolios are incrementally yielding less because they have older-dated (higher yielding) investments that are rolling off,” Carroll said from his Charlotte, North Carolina office. “They have this quandary about what to do.”
So far this year through May 29, stock mutual funds have seen inflows of $106 billion, while taxable bond mutual funds have had inflows of $116 billion, according to Lipper, a unit of Thomson Reuters. (Those figures exclude exchange-traded funds, which often attract short-term investors)
That disparity was more drastic last year, when investors poured $257.8 billion into fixed-income, while equity funds had outflows of $129.2 billion.
Overall, more than $2.6 trillion is stashed in money market funds, according to the Investment Company Institute. The average yield on a money market fund is less than 1 per cent, according to Bankrate.com
Carroll said a steady diet of economic threats was behind investor wariness, with the recovery in equities doing little to temper those fears.
“We need a period of protracted calm, and since 2009 we’ve had no less than a succession of quarterly the-world-is-coming-to-an-end events,” Carroll said, including the flash crash in 2010, the federal debt ceiling debate in late 2011 and federal budget cuts early this year. “If you think back to prior recessions and prior big market corrections, there was a period of calm and it was a return to normalization.”
REORIENTING CLIENT CONVERSATIONS
The key for advisers, who are constantly engaged in conversations with clients, is to not only help rebuild trust, but also reorient their approach to wealth management, Thiel said.
“What we’re trying to do is evolve to find out what that money is designed to do – is it for a comfortable retirement or is it for their children?” Thiel said. “How long they can invest is important, and so we try to pick the asset that best matches that liability.”
Wells is encouraging clients to put their money to work in an effective way, and pushing more clients toward financial plans – a program called Envision that it started in 2004. In the past nine years, more than 80 per cent of key households with brokerage accounts at the firm – those with at least $250,000 in assets – have a plan of record.
“Our biggest challenge right now is motivating clients simply to take action,” Carroll said.
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