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Public's loss of confidence could be Wall Street's greatest crisis

The losses suffered by investors in the past 30 months are staggering. As measured by the Wilshire Total Market Index, the value of publicly traded companies has plunged by $7 trillion since hitting a peak in March 2000 -- $2.4 trillion has been lost in the first six months of this year alone.

But, perhaps the biggest hit for the financial services industry has been the loss of Main Street confidence from La Jolla to Long Island in the markets, corporate leadership and the people who run the show on Wall Street.

A study of investors by Schulman, Ronca & Bucuvalas Inc. finds that 69 percent of those surveyed say they "don't trust businesses' financial reporting any more."

"The surprise here is not the crisis of confidence in the current market," said Mark Schulman, president of the market research and consulting firm. "More surprising and perhaps reassuring are that many Main Street investors still cling to the traditional notion that the stock market is the place to be over the long term. In spite of the battered state of their portfolios and ongoing scandals, many investors are still able to take a more positive long-term view."

Those words couldn't come at a better time for the people who provide financial services to investors. Stockbrokers -- or as they are officially known, registered representatives -- have seen their incomes come down right along with the stock market.

The Securities Industry Association reported last week that the average total earnings of registered representatives last year was $164,393. Not too shabby, but that represents a dip of 17 percent from the $199,804 they earned in 2000.

"The decline in broker compensation reflects what happened more broadly in 2001," said Steve Carlson, SIA vice president. "It was a tough year with a slowing economy, market instability, and the tragic events of Sept. 11. It was a trying year for investors, and not surprisingly, RR's lower total earnings reflect that."

The somewhat tenuous relationship that many investors have with their financial advisers took another hit when the New York State Attorney General charged that Merrill Lynch -- the biggest of the Wall Street investment firms -- was allowing banking relationships to have an impact on the recommendations that were being issued from the research team.

The situation led Merrill Lynch to make a civil payment of $100,000 and enact new policies to insulate research analysts from any "real or perceived undue influence" from its investment banking division.

"Our objective from the start has been to reinforce investor confidence in the way securities conduct their research and make investment recommendations," said David Komansky, chairman and CEO at Merrill Lynch. "The actions we are taking will ensure that analysts are compensated only for the activities intended to benefit investors. We believe this establishes a new industry standard for independence and objectivity of research."

Of course, the alleged conflicts of interest at Merrill Lynch have allowed other companies to jump at the chance to provide stock research information that is impartial and independent. For instance, the Charles Schwab Corp. has introduced Schwab Equity Ratings, "an objective system for rating more than 3,000 U.S. stocks that is free from investment banking and commission-based sales conflicts."

"Because we don't have an investment banking business, we don't have the conflicts that often arise from trying to serve both corporate clients, who need a firm to raise capital by selling their securities to retail investors, and individual investors, who are entitled to advice based on their personal needs and objectives," said Charles Schwab, founder of the discount brokerage firm.

The response of the full-service brokerage firms to these challenges to their core business has been to develop services that are more user-friendly and fee-friendly. Fee-based brokerage accounts continue to seize a growing percentage of the financial services business -- 26.1 percent of total gross commissions came from fee-based accounts in 2001 compared to 20.1 percent a year earlier.

"Clients have more opportunities than ever to select the type of relationship that works best for them, and this builds stronger, long-term relationships based on trust and customer preference," said the SIA's Carlson.

However, bottom line, the financial services has to restore the trust of clients who have available to them a growing variety of self-directed accounts that need no professional guidance. Proving the worth of their services will be a daunting task.

"We must continue to educate investors about the risks, as well as the rewards, of investing," said Matthew Fink, president of the Investment Company Institute. "We must continue to describe our products and services to investors more clearly and coherently. So long as we devote ourselves to maintaining the integrity of our industry, I have no doubt that the future will be bright for our shareholders, and therefore ourselves."


Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money in the Morning" on KOGO 600 AM.

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