Executive Summary:
- There are few differences between investors of different net worth, but where they vary, we can learn important lessons.
- The very wealthy are more likely to work with advisors, are more willing to diversify investments internationally and take care to introduce their children to their advisors.
- In my opinion, the mass affluent can learn from this and be more financially secure.
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| The Rich understand that their advisors are looking out for them. |
A report from Spectrum Group examining the differences between investors based on their net worth level had some interesting points. They surveyed investors ranging from Mass Affluent - those worth $100,000 - $1 Million, Millionaires - those worth $1 - 5 Million and Ultra High Net Worth - those worth over $5 Million. Amongst them, the Ultra High Net Worth were more likely to use an advisor. As an investment advisor, I could take that as great news. The clients with more money are the ones who want to work with me, right? But that likely has more to do with their very busy and complex lifestyles. They probably also have plenty of other hired "staff" to take care of details that they cannot be bothered with. In other words, having an advisor, for the UHNW crowd, is a product of their money, not the other way around.
I kept digging as the report still had some things to reveal about investor behavior.
One stereotype of the very wealthy is that they have a lot of their net worth tied up in their business. Think of Warren Buffett, Donald Trump, the Waltons and the Koch Brothers. They are fantastically wealthy and much of that wealth is tied up in businesses (some publicly traded, some private). According to the survey, about 4% of the net worth of the UHNW crowd was tied up in private business. This was the same amount as the Mass Affluent had! Maybe the UHNW folks had already sold their businesses, but maybe they were just like the rest of us (except with more money and an advisor). The big story about their net worth is that they had much more money available for liquid investments and less money tied up in their home.
Of those investable assets, people have three options, manage it themselves, hire someone to manage it, or pick somewhere in between. Reinforcing the likelihood of the very wealthy to have an advisor, they were much more likely to have someone else manage their money. 53% of the Ultra High Net Worth individuals had an advisor either manage or consult on how to manage their wealth, compared with only 41% of the Mass Affluent.
This again gets back to the UHNW needing to have someone handle some of their affairs, but there is something else here. Many less affluent investors either wrongly believe that they do not need or cannot afford professional help with their assets. This is just wrong. While any given asset manager may not be able to outperform any given benchmark, many advisors do add real value to their clients' financial lives. Our value is not in getting a few basis points over the S&P 500, but in the tens of thousands of dollars we generate for clients by optimizing pension and social security withdrawals, the details of asset location to save on taxes and the peace of mind knowing someone else is figuring out the details for them. Bad decisions and mistakes can be very costly to any investor, whether in returns never realized or actual money misspent. If all your advisor does it reduce those mistakes, they are worth something to you.
The Ultra High Net Worth investors understand the value of an advisor, and maybe that is something that the Mass Affluent could benefit from!
Amongst their top worries, the wealthy and the merely affluent are much the same. They worry about government gridlock, political environment and stock performance in broadly the same high amounts. Notable departures, however, are that the UHNW do not have to worry about inflation, as the cost of a lifestyle is not as big of an issue. They are insulated from the rising cost of basic goods and services to some extent. Additionally, they do not worry as much about interest rates that they earn on savings. When you have much more of your assets invested, the interest you earn does not have a very notable role on your income statement.
When it comes to foreign investments, the very wealthy are much more comfortable investing outside of the United States. The survey in 2016 repeated an earlier survey in 2012, and everyone has gotten a little more skittish on foreign investing. But while 50% of the very wealthy are comfortable with foreign investments, 72% of the mass affluent are adamantly opposed to it. Domestic or "home" investment bias is a big issue. While US stock returns have always been the core of US investor portfolios, they could benefit from foreign exposure. Diversification into foreign markets lowers the overall risk of portfolios and can increase returns over the long term. While foreign stock returns can be more volatile than US returns when economic and currency swings go hand in hand, investments abroad are useful sources of return when US returns are sluggish.
Foreign diversification is certainly something that most investors could probably benefit from. This is a lesson the Mass Affluent may want to pick up form the Ultra High Net Worth investors.
Lastly, Ultra High Net Worth investors are looking to future generations. They are much more likely to be active in making sure that their wealth is well-managed when they are gone. 62% of the very wealthy would introduce their children or grandchildren to their advisors versus 39% of the Mass Affluent. This is important, not just in letting your own wealth continue to have an impact but by simply getting future generations started on the right foot. While children of clients may not have large accounts themselves, as an advisor, I want everyone to be financially fit and am happy to work with people who understand the importance of an advisor. The Mass Affluent can make their next generations better off by starting those conversations and making introductions. Even if their legacy does not include a huge inheritance, it can still include financial security.
Overall, the Ultra High Net Worth appeared to be very similar to the Mass Affluent. After all, we are all just humans with the same wants and needs. The UHNW were just wealthier. There were a few significant ways in which they differ, though, and therein lie some important lessons for the Mass Affluent.
