By David Connell

I wasn't going to write about Martha Stewart this month—I swear. When stories of her alleged involvement in the IMClone insider-trading scandal began circulating, I thought the issue had week-long legs—if that. Besides, haven't we already given Martha enough grief in this column?

Then the July 1 edition of Newsweek came out, and there she was smiling coyly from the cover, hovering over the bold headline, "Martha's Mess." Inside were photos of Martha with her pretty-boy broker Peter Bacanovic—this guy looks more suited to walking down a runway in Milan than dispensing sound financial advice. The article was also filled with tabloid writing, deriding Martha and the world she comes from:

"But l'affair Martha isn't just about ImClone. It has also pulled back the crushed-velvet curtain on the clubby world of New York's social elite, a place where the rich and powerful pass around insider business gossip as readily as the help passes out smoked-salmon canapés."

This got me thinking about investor confidence. Can anyone reading about Martha want to enter the market when the odds are so clearly stacked against them?

Can anyone reading about Martha want to enter the market when the odds are so clearly stacked against them?

Then WorldCom hit with The Washington Post headline screaming "WorldCom Says Its Books Are Off by $3.8 Billion: Criminal Probe Reported." This, of course, set off an avalanche of gloom-and-doom headlines that in turn sent investors scrambling away from the market and stuffing cash under their mattresses. Here are a few choice screamers from the days following WorldCom's announcement:

"The Gang That Couldn't Loot Straight" (Salon, 6/27/02)

"In Blossoming Scandal Culprits Are Countless" (Washington Post, 6/28/02)

"Irate Over All the Scandals, Pension Funds Go to Court" (New York Times, 6/28/02)

"Scandals May Delay Recovery" (LA Times, 6/30/02)

"Measures Not Likely to End Abuses" (Washington Post, 7/10/02)

"Stock Declines Prompt Lifestyle, Portfolio Changes" (Washington Post, 7/19/02)

And that's just a small sampling of the headlines Media Watch spotted in July.

Investment experts, policy analysts and economics professors backed up these headlines, telling us that despite a recovering economy, investor confidence has been rocked by corporate scandal. While this was a recurring theme, I found this bit of text from the LA Times story "Scandals May Delay Recovery" to be particularly well put:

"The fact that sustained declines occurred in the face of statistics showing the economy doing better than expected suggests it is not just growth worries that caused the price tumbles; it is also the scandals. The reason is that they threaten to destroy investors' last hope of recovering part of what they have lost.

“Until the scandals, the only explanation for what had gone wrong was that the nation had experienced the biggest stock market bubble in its history.…

“Once the bubble burst, investors lost their chance to profit from the price run-up. But there were still the earnings. Or at least there were, until some companies began admitting that much of their earnings were fake.

“‘The old answer to what went wrong is that there was a bubble,’ said Brookings Institution economist Gary Burtless. ‘The new one is that even the part you thought was real turns out not to be.’”

Then, as they always do, the reporters began turning to polls to confirm—undeniably—that investor confidence was at levels not seen since the Great Depression. A Washington Post/ABC News Poll reported that three out of four poll respondents said wrongdoing by Enron, WorldCom and other corporations is "a sign of broader problems with the way many companies report their finances." A broader poll from CNN, USA Today and Gallup News Service found a deep-rooted mistrust of big business. According to the poll, more than seven in 10 Americans believe that "top executives at large corporations taking improper actions to help themselves at the expense of the company… [is a] widespread problem." Even more disturbing for financial advisors is that 29 percent of those polled believe "stockbrokers telling investors what is best for himself or herself, rather than what is best for investors… [is] very widespread." Forty-three percent of those polled thought this practice was "somewhat widespread."

Another Washington Post/ABC News poll showed that close to 40 percent of those surveyed said "they or someone in their immediate family has been hurt financially by the recent sharp drop in stock prices." It also found that a whopping 80 percent now consider stocks a risky investment. Three years ago, only half of those polled said the market was a risky place to keep their money.

Now the good news
What good news could possibly come out of all this you might ask?

There are several ways to capitalize on… let's say, the latest round of investor skittishness. First, there is the back to basics approach. Financial advisors and insurance agents can use these clips to sell life policies, fixed annuities, even low-risk mutual funds—anything that can be perceived as sheltered from market volatility.

Second, with controversy swirling around big brokerages like Merrill Lynch (where Stewart's boy toy plied his trade), investors are looking for someone they can trust—someone who is independent, ethical and not prone to giving advice that benefits himself rather than his client. Take this quote from the Newsweek article "Bad Boys Club" (07/01/02):

"Just look at the success of Edward D. Jones, which is growing so fast that it may soon have more brokers than any other firm in the country. Jones … doesn't engage in high-profit games that disadvantage customers. It doesn't peddle high-cost house-run mutual funds, it doesn't promote trading stocks with borrowed money. … It refused to let customers do Internet trading because it feared they'd hurt themselves."

What does Jones sound like? If you're an insurance or financial advisor, it probably sounds a lot like your business. And with investors looking for someone to trust, you're poised to pick up the pieces left behind by huckster CEOs and sham brokers. Now go out there and guide the sheep through the forest.

CNN/USA Today/Gallup News Service Poll on Investor Confidence

Washington Post/ABC News Poll on Corporate Scandals and Political Fallout

Washington Post/ABC News Poll on Investor Confidence

Web Columns

Advisor Spotlight

Media Watch

Advisor Spotlight

Top     Get Advisor Today: Join NAIFA     Contact Webmaster

LEGAL NOTICES

© Advisor Today 2002. All Rights Reserved.