15 transformational events: Investors lose confidence in Wall Street

An enduring consequence of the financial crisis and recession that followed was a loss of investor trust both…

An enduring consequence of the financial crisis and recession that followed was a loss of investor trust both in financial services companies and in the markets themselves.
“There was a lot of blame to go around, but Wall Street has much of the blood on its hands,” said plaintiff’s attorney Andrew Stoltmann, who has represented a wide range of investors in litigation against financial services companies in the past five years.
“2008 hit investors like a two-by-four across the forehead,” he said. “It convinced them that the markets were rigged against small investors and in favor of the banks and brokerage firms.”
From Bernard Madoff’s Ponzi scheme to the subprime-mortgage meltdown, the numerous examples of fraud and self-dealing on Wall Street over the past decade caused a loss of trust and confidence among investors that continues to hobble the economy and financial markets.
“Some might say the crisis flushed a lot of excesses out of the system, but the human costs were enormous,” said John Rogers, president and chief executive of the CFA Institute.
“One-fifth of world gross domestic product was wiped out, and it set the global economy back many years,” he said. “You can’t associate all of the problems with the financial crisis, but this was the worst global recession in 70 or 80 years.”

PHOTO GALLERY 15 transformational events

Mr. Rogers suggested that while the average investor doesn’t differentiate among financial professionals, large financial institutions continue to shoulder much of the blame in the public’s eye.
A Gallup Inc. survey published last month found that just 37% of 1,000 Americans surveyed expressed confidence in financial institutions or banks. Europeans were even less trustful, with 13% of consumers in Greece and 27% in the United Kingdom expressing confidence in the financial sector.
The broader financial services industry isn’t faring much better.
“Regional banks and less well-known companies not burned in the financial crisis have probably fared better, but the financial services industry as a whole is in a pretty bad place,” said John Patterson, a senior adviser at the Reputation Institute, a public relations firm.
In the wealth management landscape, “less well-known” independent registered investment advisers that can distance themselves from blame for the financial crisis are likely benefiting, though the organization hasn’t assessed reputation in the small-firm sector of the industry, he said.
Registered investment advisers have been seizing market share from the large Wall Street firms since the early 2000s, according to Cerulli Associates Inc. data.
Despite all the distrust, however, investors appear to give their own adviser the benefit of the doubt.
“I think there’s an element of the Stockholm syndrome at work,” Mr. Patterson said. “Investors distrust the industry as a whole but love their own broker or adviser.”
Given that no matter what, investors still have to manage their finances, they actually may be looking to professionals more frequently to help with the job.
“If the game is rigged for individuals, the idea is that it isn’t [rigged] for professionals,” said Charles Elson, a law professor and expert on corporate governance at the University of Delaware. “Investors have to put their money somewhere, and I think they’re channeling more of it into the professional investor class.”
That, Mr. Elson said, has led to an increase in activism in the institutional investor community, as JPMorgan Chase & Co. chief executive Jamie Dimon’s recent showdown with shareholders suggested.
Mr. Elson sees a broader range of mutual fund and pension fund investors taking a more active role in the corporate governance of companies in which they invest.
“A greater system of accountability is one positive result of the financial crisis,” he said.