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Time to retarget the individual investor.

Time to Retarget The Individual Investor

Where have all the individuals gone? Individuals no longer are the movers and shakers of the U.S. stock market, but they're still the rock. While institutions account for about two-thirds of daily trading, American households still hold some 55% of the common stock of U.S. companies, as last counted by the Securities Industry Association (SIA). For a fair figure, added to that should be all the assets invested in stocks of pension and mutual funds where individuals are either the customers or beneficiaries, even though the money is being institutionally managed.

Despite their clout, individuals have become something of an enigma to both corporations and the investment community. With Wall Street, it's strictly a matter of economics. Commission revenue from stock transactions is down - both in the retail and institutional segments. Reduced revenue means fewer brokers and analysts; the circle is turning.

With companies, it is the institutionalization of the market that has chased individuals down the priority ladder. Institutionalization facilitates capital formation in many ways: * More stock can be placed more quickly by institutions; * Waves of institutional buying push up the price faster; and * The institutional market is more efficient, more easily defined, and more readily reached in the contact process, with more measurable results.

Companies clearly are caught up in that institutional world, easily justifying it, because that's where the market is and is going, where stock prices are set, and where relationships can be built, with measurable results. That's reality.

But the question becomes how much emphasis individual investors should receive in corporate communications programs. Individuals are "the market" for small companies because the amount of shares available tends to not be enough to attract a lot of large institutions. But individuals are good for large companies as well. They are inclined to be longer-term investors, with goals that involve building a "nest egg" and saving for specific future needs, and they are very bullish about reaping the returns from letting investments mature. They tend to stay focused on the fundamental strengths of the company that are so essential to higher valuation.

The conviction is almost universal that individuals are important to the economy, the stock market, the ability of business to raise money, and even to the successful investing by institutions. Concern over the "loss" of individuals to the market is being expressed across the investment community - from brokerage industry leaders to the heads of the stock exchanges and by the biggest institutional investors.

The SIA calls the loss of individual investors "a loss to all. Retail investors are a key buffer to the markets. They buy and hold for real quality and for the long run. This is important to everyone."

Is it the proper role of business to encourage stock investment by individuals? Yes. Business has a strong record of responding to threats to survival while capitalizing on opportunities to grow - from taking actions against erosion of markets to refining technologies and marketing techniques to yield seemingly endless flows of products. The loss of individuals as a source of capital and force of support for corporate policies is good reason for working to re-establish concrete initiatives for individual investment and to mobilize a serious communications campaign aimed at the retail segment.

Corporate America has a tendency to be tongue-tied when it comes to speaking for itself, despite the abundance of lobbying offices in Washington, D.C., and state capitals. Companies tend to respond with legal maneuvers while staying out of the mainstream of communication and persuasion. They waited a long time before entering the fray on governance issues, presenting arguments for the unique skills and experience of business managers in running competitively strong companies for the economic good.

Lobby for tax relief

One way for business to help is to lobby for tax relief for individual investors. The 1986 tax reform act "exacerbated the exit" of individuals, the SIA says, at the same time it was encouraging more corporate debt financing. "By eliminating targeted tax incentives for savings and investment, that act eliminated distinctions on income from risk and riskless investments." The SIA also points out the various ways other industrialized countries support individual investment in stocks. Of 10 countries studied, four have no long-term capital-gains tax and four others have rates lower than those in the U.S. Eight of the 10 minimize the effect of double taxation by providing offsetting investment incentives in their tax codes.

Companies also can use their communications programs to encourage stock investment by individuals. They have both the opportunity and the need. No one else seems to want to promote stocks aggressively any more. The brokerage industry is targeting individuals but is pushing portfolio management services ahead of stocks. Mutual funds are promoting the mix of their products, which include stocks, but seldom feature them. Banks are promoting money markets and certificates of deposit in the ongoing "rate wars." Banks aren't allowed to advertise personal trust.

Re-emphasize equities

The picture, however, may become more positive in the 1990s. There is good indication that a number of the major national wire houses are starting to market equities aggressively to individuals. Dean Witter Reynolds, Merrill Lynch, and Shearson Lehman seem to be leading the charge. Account executives, trained for years to sell from a package of investment products, are being taught once more how to sell stocks. Securities analysts are going into the field, visiting various branch offices in helping the brokers. This decade could very well witness a return to emphasis of equities by the brokerage industry as it seeks to restore profitability by returning to some past glories.

In marketing the wisdom of stock investing, the evidence is favorable. Over time, stocks are shown to produce the highest returns. Can senior managements, investor relations, and corporate communications officers be convinced that it's good strategy to spend money in restoring confidence in stock investing broadly among individual investors? Probably not, if companies are striving for maximum efficiency in their securities marketing efforts and measurable results in a fairly short period of time. But the considerations should be far more basic and much broader.

William F. Mahoney is an investor relations consultant to several multinational companies, as well as the Editor of the National Investor Relations Institute's newsletter, Investor Relations Update. This article is adapted from his new book, Investor Relations: The Professional's Guide to Financial Marketing and Communications, published by the New York Institute of Finance (available in bookstores or by calling (201) 767-5937). Copyright [C] 1991 by the New York Institute of Finance. Adapted with permission of the Publisher.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Chairman's Agenda: Balancing Shareholder Interests
Author:Mahoney, William F.
Publication:Directors & Boards
Date:Mar 22, 1991
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