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RETAIL INVESTORS KEEPING MONEY OUT OF THE MARKETS AND UNDER THE MATTRESS

TowerGroup Research Underscores Trend That Cash Products Won’t Quickly Reverse, SMAs May Offer Attractive Path Back to Markets

NEEDHAM, MA, July 9, 2003—In recent years the securities industry has lost its most prized possession: the client’s trust. Retail investors have moved their money to the sidelines in droves, reeling from crises in corporate governance, a continuingly fragile economy and geopolitical instability. This has left the securities industry wondering just what will lure those assets out from under the mattress and back into the markets.

New research from TowerGroup emphasizes that the flight to cash and cash-equivalents will not quickly abate. But separately managed accounts (SMAs) may offer skittish investors a practical path back on to the investing track, if retail brokers are able to clarify their value propositions for clients and prospects, and demonstrate that they are listening to client needs. Highlights of the research include:

• The last five years have witnessed a massive flight from equities to “safeties.” From 1998 to 2003, the assets in cash and cash-equivalent accounts rose from $3.6 trillion to $6.2 trillion, a 72% compound annual growth rate (graphic available upon request). These assets now equal the entire amount of money invested across all mutual funds. TowerGroup does not believe that this trend toward cash will reverse in the near future.
• Retirement investment is the one area where retail money continues to flow into the markets. Here, dollar cost averaging and nearly invisible payroll deductions continue to “force” investment from the American workforce. Ongoing contributions will continue to prop up retirement assets despite declining market capitalization and returns. However, the decline in the value of 401(k) assets presents an ongoing discouragement to the average retail investor.
• Money will eventually flow back into the markets – particularly given the recent mortgage refinancing rush that has left many Americans with lowered monthly payments and added cash on hand. The question is, how soon and how much?
• Many retail investors will return to the markets via SMAs, which are likely to become the predominant vehicle over the next five to seven years for individual ownership of securities. TowerGroup believes that assets held in SMAs will grow at a compound annual growth rate of 18.5%, bringing total assets from $399.7 billion in 2002 to $1,105 billion in 2007 (graphic available upon request).

“Today brokers and investors are both struggling to understand each other again, as they attempt to revitalize a heavily damaged value proposition,” said Dennis Ceru, director of Retail Brokerage & Investing, and author of the research. “While investors want to believe in the market again, the securities industry needs to give them a good reason to come back. And regardless of the amount of assets they have at their disposal, investors want the same thing: honest, actionable advice that help them achieve both financial goals and peace of mind.”

Ceru noted that this point cuts to the heart of the opportunity for securities industry participants. “Retail brokers must clarify their value proposition to their client base and prospects. The key is listening to clients, creating a holistic and rational method of reaching key financial goals, and maintaining a clear understanding of a client’s tolerance for risk. In short, it’s time for the industry to step up and reclaim its rightful position as trusted financial advisors,” he said.

Those interested in purchasing a copy of the ViewPoint may contact TowerGroup at 1-781-292-5200 or service-info@towergroup.com.

About TowerGroup: TowerGroup—now celebrating its 10th year—is the leading research and advisory company focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s largest financial services, technology and consulting firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in New York, London, and Kuala Lumpur, TowerGroup serves a global client base.