At the Investment Company Institute’s 51st General Membership meeting last week in Washington, D.C., speaker after speaker warned that the financial crisis has changed markets permanently. Instead of assuming that stocks will return about 10 percent annually as they have done for the past 8 decades, investors should expect results of around 6 percent, said James Staley, CEO of J.P. Morgan Asset Management. “We are in for a period where costs will be higher and returns will be lower,” said Staley.
Costs of trading will stay high because Lehman Brothers and other important market makers have vanished, said Staley. Corporate profits will be lower because companies cannot use the kind of leverage that magnified results in recent years.
The long-term changes are not limited to Wall Street, Staley said. Around the country, millions of investors have turned more cautious, selling stocks and shifting into money markets and Treasuries. To make his point, Staley asked members of the audience to raise their hands if they had become more conservative about managing their personal money in the past two years. In the room of several hundred mutual fund executives, nearly everyone admitted to becoming more conservative. That caution is helping to choke off credit to borrowers and stifle the economy, said Staley.
Some speakers said that clients had reacted to the downturns by becoming angry at their advisors. That worked to the advantage of TD Ameritrade, said Sandra Motusesky, senior product manager of the brokerage and custodian. Motusesky said that the broker got a surge of new clients as the market collapsed in the fall. From September 2008 through March 2009, TD Ameritrade signed up 490,000 new clients. In contrast, TDA only won 360,000 new clients during the first six months of 2008. “People still wanted to invest, but they were not sure that they could trust the guidance that they had been receiving,” Motusesky.
She said that TD Ameritrade’s advertising campaign helped to win over customers. The television spots promised to provide objective guidance and straightforward pricing.
To assure investors that they will have secure retirements, the 401(k) system needs to be reformed, said Robert Reynolds, chief executive officer of Putnam Investments. Reynolds said that all participants should be offered the option of investing in annuities or insured investments that would provide guaranteed lifetime income. Investors could put money into annuities regularly over the years, or they could convert part of their savings into an immediate annuity on retirement. To protect the assets, Washington would have to create a national insurance fund that would resemble the Federal Deposit Insurance Corporation.
Reynolds also called for new rules governing target-date funds. These popular 401(k) choices hold mixes of stocks and bonds. As the investor approaches the retirement, the funds become more conservative, shifting assets out of stocks and into bonds. But Reynolds said that many funds designed for older investors are too aggressive, keeping more than half the assets in stocks. That resulted in big losses last year during the market decline. New rules should limit the amount of equities that the funds can hold, Reynolds suggested.