The Ultra-Affluents’ Core Characteristics That Advisors Should Know

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One billionaire commands in excess of $1,000 million in net worth, which can easily generate $50 million in annual pre-tax investment income.

Put all the billionaires together and their total worth exceeds the combined income of the bottom 60% of the world population in 2000. Without question, private wealth is alluring and intimidating and intoxicating to those who possess it and to those who strive for it–especially the truly rarified private wealth.

The last two decades have produced the greatest growth in private wealth creation that the world has ever seen. Not only are more people wealthy, but the wealthy are wealthier. Even when we adjust for inflation as well as the decline in the stock market, the wealthy of today are richer than in any time in history.

The wealth of today overshadows the wealth of generations past. Nowhere is this truer than in the United States. The American Dream is one of private wealth, and it is thriving.

The Wealth of the Ultra-Affluent

The first question concerns the amount of wealth controlled by the Ultra-Affluent. Just how much money are we talking about? In order to estimate this number and the scope of private wealth in the United States, we developed an analytic model. This model is based on proprietary data as well as data from other institutions, among them Merrill Lynch, The Spectrem Group, Cornell University, The Essenes Trust, The Soloton Society and The International Association for Research in Income and Wealth.

The model enables us to create numerous possible estimates of the amount of wealth the Ultra-Affluent control. As with all models, we were able to generate range of estimates: a best estimate, a low-end estimate and a high-end estimate. These three estimates enable us to bracket the aggregate wealth of the Ultra-Affluent. (See chart.)

To begin our analytic process, we defined the Ultra-Affluent as a family unit with a net worth of $25 million or more. We are focusing on what most professional advisors and financial institutions would consider significant private wealth. Included in this calculation are billionaires (however, in the model we capped their wealth at $1.2 billion so these few extremely wealthy families would not skew the data; this yields a more conservative result).

With these methodological decisions, the best estimate from the model is that the wealth the Ultra-Affluent commands is $11.9 trillion. The low-end estimate puts the combined net worth of the Ultra-Affluent at $8.4 trillion, while the high-end estimate is $13.8 trillion.

Clearly, a market that is between $8.4 trillion and $13.8 trillion is a very attractive market for everyone in the financial services industry.

The Core Characteristics of the Ultra-Affluent

This new market, generated by the robust economy of the recent past, has become the number one target of advanced financial advisors. Like every other market, however, this one requires a particular skill set. In order to be successful with the Ultra-Affluent, producers must understand them intimately. Anyone wanting to be successful must understand the core characteristics of the Ultra-Affluent.

The same model that enabled us to estimate the wealth controlled by the Ultra-Affluent in conjunction with assessments of a range of professional advisors working with these well-heeled families allows us to profile the core characteristics of this group. Four core characteristics form a conceptual framework advisors can use to think about all the factors important in working with the Ultra-Affluent.

These core characteristics are shared by other people to a greater or lesser extent. They are, however, emblematic of the Ultra-Affluent. They strongly influence the attitudes and behaviors of the Ultra-Affluent and are more pronounced with them.

The four core characteristics of the Ultra-Affluent are complexity, control, capital and charity.

Complexity. The worlds the Ultra-Affluent move in are especially complex. The personal and financial situations of the Ultra-Affluent tend to be more intricate due to their wealth. External macro-environmental factors (e.g., tax and estate laws, as well as other regulations affecting their sphere of action) weigh in. The Ultra-Affluent are not unconstrained in their control over their capital. The very policies that constrain them also create significant complexity.

This characteristic of complexity describes the financial affairs of the Ultra-Affluent. Their financial affairs are much more involved because they need to structure assets to maximize their value and ensure their preservation. The Ultra-Affluent confront more intricate financial issues from embedded capital gains to effective tax management.

Control. Another core characteristic of the Ultra-Affluent is control. The Ultra-Affluent characteristically seek to exercise dominance in various spheres of life including family, community and work. Often due to ego strength born from demonstrable success, the Ultra-Affluent tend to see their views on any subject as the best ones. Due to the complexities they face, there is a strong tendency to exercise their will.

When the objective is the perpetuation of the founding fortune, the strategies and tactics that are employed do more than just ensure the tax-efficient transfer and perpetuation of vast wealth. They create an emotional and cognitive framework in which the benefactors must live. There is a psychological, if not legal, hold on the benefactors that (paradoxically) makes many of them actually quite ambivalent about the situation.

Capital. The Ultra-Affluent tend to define themselves more in terms of the application of wealth than in terms of their actual wealth. For the Ultra-Affluent, capital–another core characteristic–is very often their measure of personal value. In general, the Ultra-Affluent measure themselves by capital and not in terms of net worth.

Money is not the gauge by which they generally rate themselves–it is capital because capital is the ability to deploy resources to make things happen. This is why most of the Ultra-Affluent merge their business empires into their self-image. And, that is why advisors need to be attentive to the interplay of money and self-image among their Ultra-Affluent clients.

Charity. Public policy in the United States since the early 20th century has been to create tax incentives for philanthropic actions. The tax incentives coupled with the Ultra-Affluents desire to be philanthropists translate into tremendous benefit to the nonprofit sector. What is critical to recognize is that the Ultra-Affluent are indeed philanthropic. They are looking for ways to “make the world a better place.”

Admittedly, because of the governments decision to use tax policy to affect social policy, charitable gifting can concurrently financially benefit the Ultra-Affluent as well as the nonprofit organizations they support. Nevertheless, the Ultra-Affluent like the sense of purpose charitable gifting gives them. Indeed, quite a few aspire to be major philanthropists. The trend is for the Ultra-Affluent to gift, but taxes come into play in defining the strategies and tactics that are used to enable the charitable gifts.

The four core characteristics of control, complexity, capital and charity define the Ultra-Affluent and are a valuable framework for advisors looking to develop their practices in this market.

It is also essential to realize that there is rich interaction among these core characteristics. For example, the more complicated the financial picture becomes, the more the Ultra-Affluent seek professional advisory services that will help them manage this complexity–in order to help them achieve greater control.

Advisors and the institutions that support them, as well as those who understand these relationships can position themselves to serve this market and take advantage of the enormous profitability of this high-net-worth segment.

is principal of Prince & Associates, a research and consulting firm in Shelton, Conn. He can be reached at princeasoc@aol.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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