U.S. Deficit, Japan Quake Shake Investor Trust: Kellogg, MFS Surveys

Affluent investor mindset ‘does not match the reality of their situation,’ says MFS’ Finnegan

Trust in the U.S. financial system sank to 20% this quarter on concern about the Japan earthquake and further stock market turmoil, and even the most affluent American investors have not been spared from worry about where the economy is headed, recent studies show.

Investor Trust Index TumblesAccording to the Chicago Booth/Kellogg School Financial Trust Index released Thursday, trust in America’s financial system tumbled to 20% from 26% in the first quarter. Americans’ overall trust fell to levels last seen during the earliest months of the financial meltdown, at 20% in December 2008 and 19% in March 2009, the report conducted in March with 1,007 respondents by Social Science Research Solutions shows.

Meanwhile, the MFS Investment Management Investing Sentiment Survey released Monday shows that “mass affluent” investors have pessimistic attitudes and behaviors toward investing that may not match the reality of their financial positions.  A total of 59% agreed with the statement: "I am more concerned than ever about being able to retire when I thought I would," with only 16% disagreeing.

The pessimism is due to the lasting impact of 2008's financial crisis and concerns over potential reductions in Social Security, both of which could impact investors' ability to retire, according to the MFS survey.  The survey was conducted by Research Collaborative of 596 individuals with over $100,000 in investable assets and 610 licensed financial advisors. MFS defines mass affluent investors as having between $100,000 and $1 million in household investable assets.

The Booth/Kellogg survey’s authors noted that the survey was conducted shortly after the earthquake and Fukushima Daiichi nuclear plant disaster in Japan, which likely contributed to the decline in financial trust. Also, the authors believe that the corresponding drastic stock-market drop might have affected Americans’ level of trust.

“The latest findings show how fragile and temperamental the country’s financial system is right now, even as we slowly climb out of the recession,” said Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business, one of the survey’s authors. “This drop in trust offers some insight into how global catastrophes can affect Americans’ trust in the financial institutions where they invest their money.”

The survey found a decline in trust across most of the components measured in the index. Most notably, a significant drop in trust in banks, to 32% from 43%, was reported, along with a drop in trust of mutual funds, to 25% from 31%. Trust in the stock market slid to 12% from 16%.

The findings suggest that despite having accumulated significant assets, affluent investors’ mindset “does not match the reality of their situation,” according to the MFS news release.

"Mass affluent investors are holding significant amounts of cash and are specifically concerned about rising health care costs, the federal deficit and reductions in Social Security,” said William Finnegan, senior managing director of U.S. retail marketing for MFS, in a statement. “Their high cash balances mean they may be overly exposed to the effects of inflation. Plus, this portfolio positioning may increase their risk of not being able to reach their long-term financial goals,"

The “mass affluent” demographic’s pessimism is pervasive about everything from spending to self-assessments to economic outlook, the MFS survey shows:

  • 44% have reduced their discretionary spending over the last 12 months; only 14% reported an increase in discretionary purchases.
  • 49% agreed with the statement: "Over the past few years, I've lowered my expectations about what life will be like in retirement."
  • Mass affluent investors reported that their portfolios, on average, had 35% in U.S. equity exposure and 28% in cash positions, with fewer than one-half, or 42%, highly confident that their portfolios are properly balanced to meet their long-term goals.
  • Rising health care costs (18%), the growing federal deficit (15%), and a reduction in Social Security benefits (15%) were reported to be their greatest financial concerns over the next 12 months.

Despite their pessimism, mass affluent investors have accumulated significant wealth, with reported median household investable assets at approximately $306,000. Further, these investors have a strong disposition toward working with financial advisors, with 57% having received financial advice in the last 12 months.

Read “Yale’s Robert Shiller Says Confidence Crisis Hampers Economy: IMCA Conference” at AdvisorOne.com.

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