It would appear that investors are losing confidence and continue to look for yield that is transparent. Aivars Lode
Silence about the fear this latest technical and pricing failure of securities markets has engendered disaffection among mainstream investors. The ones who have already pulled half a trillion dollars out of mutual funds that invest long-term in U.S. stocks, in the last five years.
He watches television talking heads deconstruct the debacle. He reads newspaper and website pontifications. He is barraged by arguments he says are well-constructed, even highly-intellectual, but fail completely at addressing human fears.
“All of the voices that I encounter on this problem, they all sound institutional, they don’t resonate. I just turn off— I being the general public. The general public doesn’t listen anymore,” says Verdi, co-founder and chief executive of the ad agency Devito/Verdi.
If you think the fallout from the Facebook IPO will end any time soon, think again. Ad executives, public relations experts, wealth managers and financial advisors say that the debacle – whereby untold scores of orders never made it from an IPO crossing system onto the market and the price of Facebook shares barely stayed above their opening price on opening day -- represents a real danger for Wall Street.
It’s more than just further plummeting of Facebook’s shares: down to $28.68 a share at midday last Wednesday. That’s a drop of 24.5 percent from its ballyhooed opening at $38 on May 18 – when mainstream investors expected to get a quick pop from putting their money into the social networking giant’s shares.
But now, a $50,000 investment is worth only $37,737. And the Facebook experience will make it harder for Wall Street and fund firms to salvage their relationships with investors who don’t live and breathe the ins and outs of trading. Investors who have day jobs that have nothing to do with finance.
“Facebook stock has plummeted since its IPO, and the company is in the midst of a crisis PR nightmare. From minute 1 of a delayed launch with Nasdaq technical problems to lawsuits swirling around, Facebook is entering a danger zone,” said Ronn Torossian, chief executive of the public relations firm 5WPR. “The court of public opinion doesn’t wait – and this downward cycle of media attention is harmful.”
So far, financial firms are doing little to address this subject. Two-and-a-half days of comment requests placed to Facebook, Morgan Stanley, J.P. Morgan and Goldman Sachs as well as a dozen major asset managers were either declined or ignored as of press-time.
“I do not see any of the major wire houses or financial firms attempting to answer client concerns with this IPO,” says Philip Cioppa, managing principal and chief investment officer at Arbol Financial Strategies.
“No one wants to be implicated if an error was made or unethical behavior is discovered,” he says. “Communication is a lost art in the financial world.”
Meanwhile, financial professionals such as Paul Franke are stepping up to the plate and calming investors who otherwise feel ignored by the rest of Wall Street.
“Over the Memorial Day weekend, nearly everyone expressed their outrage to me at the failure of the Facebook quote to rise much above the offering price of $38,” said Franke, who is director of research at Quantemonics Investing and also manages a portfolio on the social media platform Covestor.
“With nearly two years of non-stop hype building up to the offering, the Wall Street underwriters really look bad pricing the stock well above any common sense valuation when measured against the other internet companies already trading publicly,” he says.
Scared investors can be dangerous investors. Just ask Mark Martiak, senior vice president and senior wealth strategist at Premier/First Allied Securities, a New York broker and financial advice firm.
During the financial crisis of 2008, Martiak had a client who, despite Martiak’s pleas, sold out of his separately managed accounts only to lose millions, when prices turned.
“He lost his confidence and couldn’t stomach consecutive daily losses,” Martiak said.
Investors in Facebook, now behind the game by 24 percent or more, have to take a similar long-term outlook. And recognize that it will be around for a lot longer than two weeks of trading.
“Advisors need to provide assurances daily when they sense that their clients are shaken by the market’s volatility,” he said.
In fact, some say that the Facebook IPO is already creating marketing opportunities for fee-only wealth advisors who adhere to fiduciary standards regarding costs. The argument being thus: if an advisor doesn’t make money per transaction but rather from a percentage of assets, there is little incentive to repeatedly push customers into new products that could be risky.
“In general, it’s reasonable to assume that the Facebook IPO has raised questions— if not concerns— among investors regarding traditional Wall Street firms. Specifically, there’s a growing awareness that because these firms do not operate under a fiduciary standard they can -- and do -- maximize profits at the expense of their clients,” said Anderson Wozny, Director, Financial Planning, Edelman Financial Services.
What can fund firms who put clients’ assets into Facebook shares do? First off, says ad exec Verdi, acknowledge the fact that investors are scared, and then treat them like human beings.
Fidelity Investments, the mutual fund company which also runs a large brokerage, said it was working with "thousands" of brokerage clients to clear up what happened to their orders, when Facebook went public.
“With the Facebook IPO, people feel like you are messing with the American Dream a little bit. I’m supposed to be able to participate in this and not be screwed in the process,” he says. “You can’t mess with the American Dream and then expect people to participate in Wall Street.”
Also, financial services firms somehow need to develop a single voice. When dozens of different industry executives get on TV and espouse dozens of conflicting opinions on financial events, investors get confused and alienated.
“You need a voice—where is the voice of Wall Street? Before I can even listen to you, I need to trust you. That is the part many are missing,” Verdi says.
To show that it is possible for a company to handle—well—a public black eye, Verdi cited the efforts of British Petroleum to regain public trust after the oil leak disaster in the Gulf of Mexico. Little actions can have big effects, he says, like educational initiatives at local high schools. All told, the petroleum giant has poured more than $150 million into promotions to help the region recover since the Deep Horizon rig disaster two years ago.
“It’s all about perception. The reality of all of this is so much less important than the perceptions. Bad perceptions can become reality if you don’t handle them properly,” he says.
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