The rising stock markets are bolstering investor confidence, not only in the markets and the US economy but in their financial advisors. Financial advisors currently rank second only to independent auditors of public companies on the Main Street Investor Survey.
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Sixty-five percent of investors participating in the survey said they have significant confidence in the US markets. That’s four percentage points higher than the confidence readings in 2011.
Of course, sentiment is tied to performance, although many investors still doubt the health of the markets.
It is often said that markets climb a wall of worry. That’s why many investors end up inadvertently defying the long staid advice to buy low and sell high. They tend to wait until the market shows them proof of its health, which means they end up buying at a much higher point.
Warren Buffett is well known for sounding a clarion call at the depths of the market during the 2008 crisis that it was time to buy equities. That ended up being brilliant advice. But behavioral tendencies of investors often cause them to become paralyzed during market downturns.
The same behavioral tendencies prevent them from selling prudently, as they think the profits will just keep rolling in.
The significance of the survey is that it was taken soon after the Facebook IPO debacle and the multi-billion dollar loss announced by JPMorgan Chase as a result of a derivatives trading snafu.
This indicates that investors base their trust in advisors to look out for their well-being.
The study also showed that investors do not understand the difference in a broker and an advisor. Many of the survey respondents invest through mutual funds and 401(k) plans.
The fact is that investor trust is largely dependent upon broader market action
, even if individual stock or company debacles don’t seem to shake it.
During the 2008 crisis, many investors held advisors accountable for the losses they incurred. This, again, is a behavioral tendency known as hindsight. Investors think that financial professionals should have been able to see it coming after they experience losses in the markets.
And although investors now seem to be accepting the premise that the markets will offer lower returns in the future, it seems reasonable to think that trust should be built on a more permanent and consistent basis than the overall action of the capital markets.
What do you strive to offer clients as a more solid basis for their trust? What constitutes trust in your eyes and in the eyes of your clients?