Simplicity key to regaining trust

28 June 2010

Simplicity and transparency are the keys to regaining investors’ trust, according to Vanguard chairman and chief executive William McNabb.

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Speaking at a Morningstar investment conference in Chicago, McNabb said financial institutions and advisers could regain investors’ faith by operating with simplicity, transparency, and candour.

He said investors were questioning basic investment tenets, such as diversification and buying and holding.

McNabb said he was not surprised by the loss of public faith in financial institutions, fund managers and advisers following the events of recent years. He pointed to corporate collapses, sovereign debt woes and high levels of share market volatility as key causes of the loss of investor faith.

“One day last month the market lost and regained nearly 1,000 points,” McNabb said.

“What effect has that had on the average investor? Trust has been damaged. Faith has been shaken.”

McNabb said the financial services industry needed reform and “a little empathy” to regain the trust of investors.

On the US reform agenda, McNabb said Vanguard supported some, but not all, of the proposals contained in the financial services reform bill to be delivered by Congress to President Obama by early July.

Vanguard is in favour of the introduction of a Financial Services Oversight Council to identify systemic risks. Vanguard is also in favour of the proposal to make the derivatives market more transparent by requiring central clearing for trades, increasing disclosure and requiring participants to prove they have the cash to back their trades, reducing counterparty risk.

McNabb said had this system been in place in the derivatives market in recent years, AIG would not have “run into — and caused — the trouble it did”.

But the fund manager is concerned about plans to let the Federal Deposit Insurance Corporation decide which creditors of failed institutions get paid, saying it would introduce new levels of risk into credit markets and “essentially wipe out” decades of bankruptcy law.

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