Market ills fail to erode sense of trust

Your Money

October 17, 2004|By JANET KIDD STEWART

INVESTORS learned some painful lessons in the last few years, from the importance of diversification to the discovery of a host of conflicts of interest on Wall Street.

Or did they?

Tech stocks came roaring back into favor earlier this year, as did the volatile emerging-markets stock sector. And independent stock research firms - those that don't derive revenues from investment banking business - have failed to catch on.

Investor complaints to the National Association of Securities Dealers ticked up again last year after declining steadily since the bursting of the Internet-stock bubble in 2000, and arbitration case filings surged 16 percent last year.

New disclosures of anti-investor practices keep coming. This month, the association of state securities regulators announced the results of a 26-state investigation of investment advisers it performed last year. Of 257 advisers examined, 200 were found to have at least one compliance deficiency.

The two most common registration deficiencies were inaccurate and out-of-date reporting on the Form ADV, no small matter to investors trying to check the background and fee structures of potential advisers.

Will we ever trust again? Some of us already do.

Brokers behaving badly and heart-wrenching market tumbles have eroded some investors' trust, but certainly not all, said Patricia D. Struck, president-elect of the North American Securities Administrators Association, which investigated the advisers.

What about when scandal hits home, moving beyond theoretical conflicts of interest and general market declines to more disturbing allegations of fraud, putting clients into unsuitable investments and other improprieties? Surely, such misconduct scares its victims into putting the remainder of their nest eggs under the mattress, with inflation and a home break-in the only real threats.

Nope.

"A lot of those people continue to be in the market, though some are more cautious now," said Struck, who also serves as Wisconsin's securities administrator. "But the saddest of all are the recidivists - the people who get burned over and over. You can tell them don't do it, but they're just so darned trusting that they don't become suspicious."

Karen and John Green of Geneva, Ill., swear that won't happen to them. The couple recently won a $200,000 National Association of Securities Dealers arbitration award stemming from their complaints about a brokerage that handled their money.

Today, the Greens still use a brokerage to handle their investments, albeit a different firm that they say offers better Internet access to monitor their account.

As a packaging industry entrepreneur and a father of a special-needs child, John Green says he has precious little time to devote to investing completely on his own, so he's opting for a trust-but-verify approach with the new firm.

Still, he recognizes that a second arbitration panel would be hard-pressed to generate much sympathy for him.

"If I'm that dumb again, shame on me," he said. "I don't plan to ever be in that situation again."

Of course, few investors do. And yet, they often continue to trust too readily, said Barbara Roper, director of investor protection for the Consumer Federation of America.

"Someone who's been through a bad experience has to make the basic choice about whether they want to continue to work with a professional adviser or manage the money themselves. And today there are certainly a lot of options available for self-directed investors," she said.

Even that can be problematic. Scorned investors have a self-defeating reluctance to acknowledge their own mistakes and move on, noted Brad M. Barber, a finance professor at the University of California at Davis who studies investor behavior.

"It's difficult for investors to come to terms with their losses," Barber said. "Selling a loser is admitting one's investment failures - something that is difficult for many investors."

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

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