Investors and regulators agree that all the reforms enacted since the 2008-2009 financial crisis won't prevent the next crisis, Suzanne Duncan, who heads the recently created State Street Center for Applied Research, told attendees at IMCA's annual conference in Chicago yesterday.

However, their reasons for believing the system will fail again differ. Regulators say in anonymous interviews that they are hamstrung by politicians, while investors simply mistrust the markets, Duncan said.

One result of investor mistrust is that a huge disconnect between providers of financial services and investors is developing, causing investors not to act in their own best interests, Duncan said. Investors are correct in their perception that markets are becoming more unstable, that correlations between asset classes are increasing and that systemic risk is rising. So their response to this condition is rational in one sense, but their increased risk aversion is increasing the probability that they will fail to reach their financial goals. she said.

Two-thirds of investors don't trust their own providers of financial services, Duncan said. Many believe the markets are too short-term in their focus.

Again, Duncan cited evidence indicating that investors' fears are well-grounded. A survey of CFOs revealed that 80 percent of them would stop spending to meet their quarterly earnings targets even if it hurt the company in the long run.

This short-term focus is evident at both the corporate and investor levels. The average stock used to be held for 6 years; now it is held for 11 months.

Both retail and professional investors overestimate their own skills and knowledge. More than two-thirds of retail investors rated their understanding of financial markets as "advanced," not just good. And—surprise, surprise—almost 100 percent of professional investors said their performance was average or better.

Duncan added that investors have unrealistic expectations about performance that are fueled by the financial industry and the media. She cited a Boston-based firm with advisors around the nation that started sending out reports with only one number—the age that clients could retire. It was 104 years old.

"Change only happens one funeral at a time," Duncan said in closing.