Hundreds of investment advisers were charged with a task. On Thursday The Vanguard Group Inc. CEO said they need to help restore investor trust in the markets.
William McNabb, who delivered the keynote address at the Morningstar investment conference in Chicago, said it may not be easy to get confidence in the system back, but it starts with candor and transparency.
Investors have seen so many unpredictable events in the past few years, they need some reassurance that markets are going to again behave like they're supposed to, he said.
Investors saw Lehman Brothers fail days after executives declared it was in good financial shape, and continue to see foreign nations on the brink of bankruptcy. The flash crash of May 6 in which the Dow Jones industrials lost nearly 1,000 points in less than a half hour further damaged investor faith in the system.
"The flash crash shook people up quite a bit," he said. "Clients want to understand whether markets will work the way they're supposed to work." He added that the quicker an explanation for what caused the crash is released the faster it will restore trust.
It has left investors questioning whether the buy-and-hold strategy works any longer and doubting the idea of diversification — whether holding a mix of stocks, bonds, cash and other investments really matters.
Some proposed regulatory changes may help, McNabb said including a systemic risk council. Lawmakers have included such a group in a financial regulatory package that House and Senate leaders continue work on.
The group would aim to avoid a recurrences of the 2008 financial meltdown by looking for threats to the system.
McNabb said trading of complex investments called derivatives also should be cleared through a central trading organization. It would shed more light on the risky investments and is one measure that could significantly reduced systemic risk.
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