Retail investors have missed out on the record rally in U.S equity markets because they don't want to risk losing their money again as financial institutions are seen as "too big to jail," James Bianco, president of Bianco Research, told CNBC on Wednesday.
"It's very clear in the statistics that mutual fund flows to ETF flows, that there have been consistent outflows over the past years, they have not participated at all," Bianco said on CNBC Europe's "Squawk Box".
To be fair, equity mutual funds have seen significant inflows this year, but nothing compared to the outflows since the financial crisis in 2008. From the start of the year until early March, $59 billion has flowed into equity mutual funds compared to an outflow of $416 billion from 2008 to 2013.
(Read More: Are Mutual Fund Investors Really 'Dumb Money'?)
Bianco told CNBC that investors were missing out on the multi-year highs seen in the Dow, S&P and Nasdaq indexes over the past months as they feared the "unfairness" of losing their money and seeing large financial institutions bailed out, despite the VIX (volatility index) at its lowest point in almost six years.
"This is the biggest thing that has held people back – It's not that the market is hard or expensive, it's because it's unfair," Bianco said.
"I've been very skeptical about the wave of cash [entering equity markets]. The biggest thing that is holding people back is that the big players either win or get bailed out and you lose and have to pay for the bailout," Bianco added.
Two weeks ago the U.S. Attorney General Eric holder said that there were some financial institutions that were "too big to jail."
''I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy,'' Holder told the Senate Judiciary Committee.
"People are worried that they'll get into the market and see a 20-30 percent decline, they will lose money and some big players will get a bailout," Bianco said.
"[Many investors] have watched the market go down, watched Royal Bank of Scotland become 82 percent owned by the taxpayer, they've watched bailouts in the U.S. they've watched executives at firms almost bankrupting the financial system get to keep that money, " he added.
(Read More: Bank of America Was More Pessimistic Than the Fed)
"They look at their financial statements and no one gave them a check, no one gave them a pass…where is Dick Fuld (the former chief of Lehman Brothers)? Where is Angelo Mozilo, the former head of Countrywide U.S? Where is the Jon Corzine, the former head of MF Global? They're not in prison, not in court, they got to walk away from the messes they created."