Changes in the regulatory and economic landscape have made many Wall Street executives more conservative and risk averse since 2008, according to a recent whitepaper from Morgan Stanley.
A tight regulatory environment including the wide-ranging financial reforms of Dodd-Frank as well as reductions in compensation were ranked by a quarter of executives as the most significant change affecting their wealth since 2008. Those factors “are creating a defensive mindset where financial services executives are most likely protecting instead of leveraging their assets,” the study reported.
And it is not just regulatory pressures. Layoffs and job loss within the industry are weighing on the minds of many executives as 44% responded that over the next five years, losing their job was their greatest worry.
“This should come as no surprise considering that a recent report from the New York State Comptroller predicts job losses in the tens of thousands for the securities and banking industries,” the report said, referring to an October 2011 study The Securities Industry in New York City by the New York State Comptroller. The October 2012 version of The Securities Industry in New York City indeed found that the financial services sector had shed 1,200 jobs.
“Wall Street firms are adjusting their staffing levels as they restructure in response to pressures from the financial crisis and subsequent regulatory changes,” the Comptroller’s report said.
Outside of industry concerns, volatility in the marketplace took its toll on executive’s confidence in their wealth. Nine percent ranked low interest rates as one of the top challenges they are facing today and just over 7% said that maintaining their existing lifestyle (i.e. affording a second house, saving or paying for education, or making charitable donations) has become a challenge.
“Executives may value liquidity in a tumultuous global market, yet due to low interest rates, they net a 0% yield on cash holdings,” the report found.
Adding to the issue, executives at public firms are seeing much of their compensation come in the form of company stock, “which places their assets in a highly concentrated position that they may be unable to diversify or change for a set number of years,” the report said.
At the same time, however, a majority of executives still do not outsource their financial planning to an advisor. Nearly 75% reported managing some or all of their financial affairs and 71% of executives said that they believed that their peers have not undergone a 360-degree financial review in the past two years.
“More than half of executives said that they manage their own financial planning because they either want to be in control or they believe that they know more than any outside expert about the markets and their risk tolerance,” the report said. “However, even if an executive is an expert in his or her own field by day, a Certified Financial Planner still adds significant value as a true expert in all the areas of wealth management necessary to help secure a high-income family’s future.”
Combined with the unique circumstances within the industry as well as market volatility and low interest rates, that self-reliance could negatively affect their financial health, the report said.
“If executives continue to manage their own investments according to risk-averse trends then a majority will see almost no growth,” the study noted.
The report, compiled by Jeffrey Peifly of Morgan Stanley Wealth Management, took into account interviews with over 100 executives with a median age of 50 years old at public and private firms specializing in commodities, banking, securities, insurance and hedge fund management.