Larry Fink: How to restore confidence in the financial markets

Virtually every developed nation today suffers from the reluctance of investors and chief executives to invest in new businesses, jobs or ideas. Investors have adopted a wait and see attitude because markets are missing the two components essential for confidence: trust and certainty.

Investors large and small are angry and cynical. For five years, they have consumed an almost daily diet of headlines pronouncing doom and gloom. Scandal after scandal in the financial industry has left many individual investors believing that the markets are stacked against them.

Those who stayed the course over the 10 years through 2009 suffered a "lost decade," with negative total returns on the S&P 500. Investors see little consensus in government for tackling the long-term fiscal and competitive challenges facing our developed economies. The result is profound uncertainty about the road ahead, a lack of trust in political institutions, and paralysis in markets.

This urge to sit on the sidelines until better times return is not only inhibiting economic growth, it is exacerbating the silent crisis of inadequate retirement savings. That crisis is already a reality for older workers, the value of whose nest eggs has plunged with the value of their homes. Many of these older workers must now find other sources of income over the longer term.

Unless we are able to educate younger workers to begin saving for retirement now, allowing their returns to compound over many decades, the retirement-savings gaps that society faces will only widen.

For example, someone entering the workforce today at age 22 who saves $4,000 a year can accumulate $1m by age 62, assuming an annualised return of 8%. If that same worker waits until age 32 to start investing for retirement, he will have to save more than twice as much each year to reach the same goal at the same rate of return.

Restoring investor confidence begins by recognising that for all the challenges that remain, there are signs of life in financial markets. Investors with a long-term perspective have benefited from the rally in U.S. equities over the past two years. There is also cause for cautious optimism about the outlook for the global economy, including actions to prevent the breakup of the euro; continued, if slower, growth in China; and the beginnings of a US housing recovery.

Make no mistake - markets will remain volatile. The unprecedented impact of political risk on the markets all but guarantees it. This volatility also creates opportunities to invest at attractive prices. US equities today are historically cheap, at a price to earnings ratio of around 15, down from a 20 year average of close to 20.

Continued progress, however, requires action from both the financial sector and government to restore the trust and certainty missing today.

In the financial services and banking industry, we must be seen as part of the solution to what ails our markets, not the cause. This requires constructive engagement with regulators on mechanisms that, without choking off investment opportunity, introduce greater clarity for investors.

The stiff opposition of the mutual fund industry to efforts by the Securities and Exchange Commission to reform the regulation of US money market funds does not instill the sort of trust we need.

Financial firms have a responsibility to be crystal clear about how their interests are aligned with those of their clients, and should be transparent about the fees and risks associated with the products they sell - from investment vehicles such as mutual funds to credit cards and mortgages.

Financial education and transparent investment products that are easy to understand and apply can allow investors to capture market opportunities and achieve the returns they need to achieve their objectives even in a complex and challenging new world. This too will help restore trust in the markets, and help those who doubt in the future today take their first steps back to being investors again.

Investors cannot be expected to do this alone. Business leaders and our elected representatives also need to take a long-term view and restore a measure of confidence about the future in their stewardship. Nothing weighs on the financial markets more than indecision.

Regardless of who wins the November 6 elections, attention is shifting from Europe's debt crisis to whether Congress will lead the US off its "fiscal cliff." Failure to avert this fall will plunge the country back into recession. Because of the uncertainty, businesses are already delaying investments and hiring. Only a bipartisan resolution can address this looming challenge and tackle the tough, longer-term issues of US debt and deficit reduction.

Another source of uncertainty derives from the complexity of the tax systems in many countries. Just in the US, for example, the tax code now has 141 temporary provisions that expire within two years, compared with just 25 in 1985. Such complexity and ambiguity discourage consumer and corporate spending, imposing a tangible cost to economic growth.

In my business, we explain to investors that they cannot save for the future in the future. It's too late by then. The instinct to preserve what we have today is a powerful, human one - but it will not build what we need for tomorrow.

- Fink is chairman and chief executive of BlackRock.