Investors Cautiously Return to Markets: IRI Study

Investors still don't trust the financial services industry, but are beginning to come around

Investors are still living in a "post-trust era," according to a Dec. 21 report from the Insured Retirement Institute, headed by Cathy Weatherford (left), but they are beginning to consider a return to the markets.

The report, conducted by Michael Maslansky, CEO of Maslansky, Luntz and Partners, is based on results from an instant response dial test of 24 retirees and pre-retirees at IRI's 2010 Annual Meeting.

"The anger toward the financial industry has started to recede as memories of the bailouts and bonuses fade. Investors have begun to move to a “recovery” mentality, and are ready to start considering more investing and income-generation techniques," write the report authors.

The report describes four factors that define the recovery mentality.  

  1. Investors are thinking about themselves. "They feel they’ve worked hard and have done their part."
  2. Investors are making emotional decisions, not rational ones. As the authors write, "this is no more a rational discussion than equities are a rational market," and advisors need to understand their clients' feelings before they can approach them with facts.
  3. There's a gap between the education advisors are providing their clients, and what clients actually understand. Advisors need to find the "right language and the right techniques to ensure that your effort is not lost on your clients and prospects so that they will 'feel' like they are getting what you are giving."
  4. Skeptical clients believe with good news comes the potential for bad news. "And that means that even astrong recovery in the market won’t equate to a recovery of trust."

Investors are skeptical of what their advisors are telling them, according to the report, believing instead that advisors are working for the firm and not their clients. Discussions about market trends or historical behavior only make them more suspicious. Investors still want a relationship with their advisors, the report notes, but they will depend more on their own research than their advisors' recommendations until trust is rebuilt.

The problem for advisors is that even with more attention, clients don't necessarily see a greater value. The report found that most respondents said they were having more conversations with their advisors, but that they don't see much added value in them. Investors want to consider new investment strategies instead of relying solely on "the same old strategies."

The key to building trust with skeptical clients, according to the report, is to address their skepticism. Advisors should acknowledge the downsides to a strategy before they address the upside, and explain why others might reject such a strategy.

Especially among affluent investors, the report notes, there's a sense that the worst of the recession is over. They've learned that "there's no such thing as a sure thing," but they're thinking about their retirements again and are investing for the long term. Investors are looking for conservative strategies that protect income. The report found that despite being conservative in their investment strategies, clients may be willing to use "new money," like dividends or income from a second job, in aggressive strategies.

The political environment is a factor in investors' hesitance to get back in the markets. They aren't sure what to expect or if it will all change again in two years, and as a result are hesitant to establish a firm investment strategy.

Respondents expressed discomfort with talking about annuities, according to the report, even though they like the products in general. Advisors should focus on the principals behind the annuities when suggesting clients add them to their portfolios. The report noted that phrases like "protected growth" and "lifetime income" help clients see annuities in a positive light.

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