Data & Research March 9, 2009

Investment Guarantees Important in Economic Downturn

Eight in ten of those in a recent MetLife poll said they place more importance on guarantees and the stability of their investments than on the level of their investment returns.
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A MetLife news release about its latest “Study of the American Dream,” said 68% of respondents indicated they are generally willing to pay more for financial and protection products if they come from a trusted company. Two in 10 (20%) strongly support the idea of a “trust premium,” while an additional 48% support it somewhat, according to a press release of the results.

That interest in stability is understandable, as the survey found many Americans are a heartbeat away from financial disaster if they lose their jobs. Even those making $100,000 or more in income per year aren’t immune, with more than one-quarter (29%) saying they couldn’t meet their financial obligations for more than one month following a job loss.

Half of respondents said they were about two paychecks away from not being able to meet their financial obligations if they became unemployed. Some 28% of that group said they couldn’t survive for more than two weeks. Following a job loss, 59% say they’d be somewhat or very concerned about having to file for bankruptcy, and 64% would be concerned about losing their home.

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The MetLife survey found three quarters of those involved in the survey have been touched by unemployment in some way as a result of the financial crisis, with nearly two in 10 reporting that they have recently lost a job and an additional 55% having a friend, relative, or neighbor who is now jobless.

“While Americans are still frustrated that they can’t count on employer-sponsored benefits such as health care and defined benefit pension plans, we’re seeing an uptick in the percentage of Americans who are confident that they can achieve financial security on their own and build their own safety net,” said Beth Hirschhorn, senior vice president, Global Brand and Marketing Services at MetLife, in the news release. “The study shows that the workplace will play a major role as employees—especially younger workers—say they are going to pay more attention to employee benefits and focus more time and energy on making smart financial decisions at work.”

Revised American Dream

According to the survey, the downturn has had a significant impact on how Americans define their financial goals with “the American Dream” being revised but not reversed. Respondents say they are no longer as motivated to purchase possessions as they were before. Nearly half (47%) of respondents say they already have all the possessions they need, up from 34% in November 2006, and three-quarters (74%) no longer agree that the pressure to buy more and better material possessions is greater than ever.

The interest in investment security is reflected in the intense interest in maintain their personal safety net as well. Currently, Americans count auto insurance (60%), health insurance (57%), life insurance (46%), homeowner’s insurance (45%), a retirement savings plan such as a 401(k) (40%), and cash on hand for three to six months (35%) as the top six components of their safety net.

The survey was taken from January 7 to 16 by Strategy First Partners in conjunction with Penn, Schoen & Berland Associates among 2,243 respondents in the United States.

The survey is available here.

 

Compliance March 9, 2009

High Court Takes on Investment Adviser Fee Dispute

The U.S. Supreme Court agreed to consider whether the level of fees paid to investment advisers to mutual fund companies can violate the Investment Company Act.
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That question is at the heart of Jones v. Harris Associates, an appeal from a May ruling of the 7th U.S. Circuit Court of Appeals. The court had thrown out the lawsuit by investors in the Oakmark funds who claimed the fees of adviser Harris Associates were too high and that Harris did not disclose certain information about its pricing process. Plaintiffs in the case are Jerry N. Jones, Mary F. Jones , and Arline Winerman.

The high court announced Monday that it would hear the case.

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In upholding a lower court decision in favor of Harris, the 7th Circuit asserted that while the fees of fund family advisers should be properly disclosed, their level should be regulated by a free market in which dissatisfied investors can take their business elsewhere (see “Mutual Fund Adviser Fees: Not for Courts to Decide’).

“The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth,” wrote Chief Circuit Judge Frank Easterbrook, in the 7th Circuit decision.

The plaintiffs argued in their appeal that other U.S. Appeals Courts use a standard that says investment advisers violate federal law when their fees are so disproportionately high they bear “no reasonable relationship to the services rendered.”

The pending U.S. Supreme Court case is Jones v. Harris Associates, 08-586. The 7th Circuit opinion is available here.

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