“The U.S. job market is showing signs of a sustained recovery. But the country’s prolonged struggle with unemployment will leave scars that are likely to remain for years, if not generations.”
–Ben Casselman, The Wall Street Journal, Jan. 9, 2012
While the prevailing mantra for the upcoming election is “job creation,” the better long-term goal may be the daunting task of replacing the trillions in lost wealth from the housing and stock markets.
While the short-term goal for being unemployed is finding a job that will hopefully work to buttress the household balance sheet. The very recent uptick in hiring may explain the renewed consumer confidence as checkbook balances grow.
But the public has a short time horizon, and it is too depressing to begin thinking about the Lost Decade in portfolio returns, combined with the fact that about 25% of the U.S. homes have negative equity. That is a near-impossible financial reality that essentially locks a homeowner into paying for a negative asset that may require decades of wealth creation to turn into a positive investment.
At the American Economic Association’s annual convention in Chicago, economists found that some 5.6 million Americans have been out of work at least six months, 3.9 million of them for a year or more, according to The Wall Street Journal.
The same research found that the longer people are unemployed, the less likely they are to find jobs, leading to a downward financial and emotional spiral. When this happened in Europe in the 1980s, it helped create a permanent underclass that strained financial resources and social agencies that is still being felt today, economists said.
How This Affects the Investment Industry
While this has definite political and social agency ramifications, it also presents some serious challenges to financial services marketing professionals who have to work in this new environment.
Unfortunately, many financial marketing professionals deny this new reality. That is simply whistling past the graveyard, as many of these same marketing people want to avoid discussing the Occupy Wall Street actions, wealth disparities and volatile investment environment as being totally detached events from the investment advice and PR activities which are conducted on a daily basis in the financial services industry. Big mistake.
While Bill Gross talked about the “new normal” (described as expectations for a decade of low economic growth, relatively high unemployment and meager stock market returns in 2009, financial marketing professionals should adopt a “new normal” for their financial services marketing activities.
Acknowledging this new marketing environment would include:
–The acceptance that correcting the nation’s great wealth disparities must be addressed by Wall Street. Ignoring this fact is not an option and is not in the best interests of the financial services industry or the nation. In the short term, this could be done by allowing low-cost ETFs into 401(k) plans, and overcoming any back-office compatibility issues by adopting new record keeper systems, such as the Invest n’Retire ETF-401(k) system. In the long-term, financial services companies should become more involved in tax and fiscal policies which promote savings and investments in all asset classes which build wealth. A Pew Research Center study found that voter perceptions of the economic divide, is “an issue that has moved to the forefront in the 2012 presidential campaign amid stubbornly high unemployment, increasing poverty and protests by the Occupy movement.”
–Realizing that despite their old aura of omniscience, investment managers, institutional salespeople, hedge fund managers, mutual fund wholesalers, and pension fund consultants are no longer the smartest people in the room. The new world of investing should humble anyone who has investment control and has to defend their portfolio performance, recommendations and products over the past decade.
Specifically, Reuters reportsthat the $1.7 trillion global hedge fund industry saw the average hedge fund dropping 4.8% and some stock-focused funds suffering an average 19% declines in 2011, according to research compiled by Hedge Fund Research and Bank of America Merrill Lynch analysts. Marketers should also note that disenchantment, combined with the realization that all “experts” are fallible, breeds serious reactions. This same Reuters story contains this reaction to depressed hedge fund returns:
“After 20 years of investing in hedge funds, I finally realize they are not the holy grail but an asset class with enormous fees, illiquidity, high leverage and hidden risk given their lack of transparency,” said Bradley Alford, chief investment officer at Alpha Capital Management.
–Accepting that the new DOL disclosure and transparency regulations, which go into effect April 30, 2012, will shine the light on some embarrassing industry practices: high fees, revenue sharing, conflicts of interest and poor 401(k) plan management. As the new regulations go into effect, investors will soon be asking tough questions centered on the value of what they have been paying in fees. This will cause some participants to suffer from “sticker shock” when some investors with large account balances see they were charged more for receiving the same services as other plan participants. The same payment questions will arise from both participants and plan sponsors on the sticky issue of revenue sharing. For unprepared plan sponsors, this is an accident waiting to happen, opening the plan to claims of breaching their fiduciary responsibilities and the revocation of the plan’s 404(c) protections.
–Acknowledging that financial services marketing practices cannot rely on the old mutual fund sales model. This model is weighted down by expensive national wholesaler sales forces, who do not add any value to investors. This model will be pressured as more people understand the role of revenue sharing and 12b-1 fees, but fund companies who want to steal the march on change should plan ahead. What about replacing national sales forces with internal hybrid wholesalers using cloud computing? This would be wrenching for inbred sales organizations, but it would better marry an organization’s knowledge capital to technology. This would appeal to the new breed of financial reps who want to better service clients.
–Realizing that it was a mistake that key executives involved in the mortgage and housing debacle were not prosecuted by the appropriate authorities. The housing-mortgage fraud event did irreparable damage to the whole system, especially among the vast anonymous crowd which comprises “the market.” Without the confidence of this vast anonymous group, the entire financial system has become weakened. This could have been corrected if regulators and enforcers simply did their jobs.
Accepting this “new normal” in financial marketing will begin to restore middle-class investor confidence in the financial services industry. Without it, the decade of low economic growth, relatively high unemployment and meager stock market returns will continue into the next generation.