The Really Rich Fared Better Than The Merely Rich In Market Downturn

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The technology bust of the late 90s hurt those on the low end of the high-net-worth spectrum more than it did the super affluent in the United States, according to a new report from market analyst Datamonitor, based in London.

Many of these so-called “mass affluent investors,” i.e., individuals holding between $50,000 and $300,000 in liquid assets, were stripped of their wealth virtually overnight as the market plunged, Datamonitor says in its new study, “U.S. High Net Worths 2003.”

The wealthiest investorsthose with liquid assets of $1.5 million and up–fared better than most because they typically have a more diversified portfolio, which mitigated the effects of the bust, Datamonitor says.

The report predicts a more favorable investment climate in the years immediately ahead. This, along with better educated investors, will boost the number of wealthy individuals in the U.S. but not to the levels seen in the late 1990s, Datamonitor says.

For financial planners and advisors, a return of growth to the affluent market would be great news. But experts warn that high-net-worth investors will be wary following the recent market volatility and corporate accounting scandals, such as Enron. Fresh allegations of fraud against mutual fund firms arent helping either.

“Investors who thought that in the equity boom everyone was an investment expert have had their fingers burned in recent years, and they will have learned a valuable lesson,” says Datamonitor analyst Alan Shields, an author of the report. “Going forward, these investors will be cautious and looking out for products that can offer some level of capital guarantee.

“The challenge for wealth managers will be to regain their trust by working with clients to grow their assets. Wealth managers cannot rely on another equity bull market to fuel the growth of client portfolios,” Shields says.

As the stock market rebounds, advisors fighting for a piece of the wealth-management pie need to be sensitive to opportunities for success, Shields says.

“I think the first thing is to build trust especially in the U.S., hit by corporate finance scandals such as Enron as well as the market failure,” he says.

For instance, in view of the recent scandal over mutual funds favoring a few select investors, investment managers need to show that individual investors are treated the same as large institutions.

For starters, banks and wealth managers can put their own funds into the same investments they are recommending to wealthy clients, says Shields.

“Its one thing to say, Invest here, and another to say, Look, weve invested here as well,” he says.

Innovation will also be key to earning trust, he adds.

“You cant keep doing what you did for the past 5 years,” Shields says. “For instance, many clients now want capital-protected products, such as property warrants where you can hedge against property risk. Or if clients have a lot of property tied up in their business, maybe you can invent ways for them to borrow money against those assets to free up capital.”

The bust only served to prove the value of advising clients to follow an asset allocation model, says Bob Musar, a financial planner, with the Uniontown, Pa., branch of the Greater Pittsburgh Agency, a unit of Prudential Financial.

“Asset allocation kind of fell out of favor during the technology wave, but clients that followed that model came through well,” Musar says.

Matt Schott, senior analyst, TowerGroup, Needham, Mass., thinks affluent clients are looking for improved risk management from their advisors. “They want you to make money, but even more important, they want you to keep them from losing money drastically,” he says.

Separately managed accounts gained in esteem as a result of the market debacles effect on mutual funds, Schott believes.

Fund investors took a double hit at the end of the boom cycle, he notes.

“In 2000, when the market tanked, the underlying securities had a lot of gains. At the same time, fund investors saw their net assets dropping every day, yet in December they got hit with a significant capital gains distribution.”

For many investors, this showed that mutual funds may not be the most efficient way to manage money.

“So the idea of using managed accounts is being touted as an effective way to handle client investments,” Schott says. “With a managed account, you have the same professionally managed portfolio [as a mutual fund], but because investors own the underlying share position, they can be more flexible in including or excluding certain securities or customizing around tax situations.”

Walt Zultowski, senior vice president of business and market development for Phoenix Investment Partners, Hartford, says of the Datamonitor study that “any projection is only as good as underlying assumptions.”

He agrees that the higher end of the affluent market is likeliest to grow, simply because it is more diversified in its investments and hence has more ability to weather market fluctuations.

The big question, he says, is whether affluent investors have been permanently changed by the hit they took in the market, or are going to get back to more aggressive investing to make up for past losses.

“I dont know,” says Zultowski. “Our own wealth management survey said people were significantly affected by the market fallout.”

As a result, Zultowski expects to see “a little more pragmatism” by affluent investors from now on.

Other findings of the Datamonitor report:

The number of individuals with liquid assets of more than $300,000 will grow at an annual compound rate of almost 7% between 2002 and 2007, from 7.3 million to 10.2 million. This compares to an expected population growth of 1.1% in the same period.

In 1998, there were 7.3 million individuals classified as high net worth, owning $6.4 billion in liquid assets. This figure peaked in 1999, to 8.5 million individuals with $7.7 billion in liquid assets. Then the markets fell, and the number of affluent slid back to 7.3 million in 2002.

In 2002, the aggregate liquid assets of affluent investors stood at $6.4 billion. That will rise to $9.4 billion by 2007, a growth of almost 8% compounded annually.

Those with assets of $3 million and up will fare even better, with their assets growing at 9% compounded annually.

Datamonitor notes, too, that the expected 8% overall annual asset growth of the affluent would be faster than that for all retail liquid assets, which it expects to grow at 6.5% annually until 2007.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 5, 2003. Copyright 2003 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.