Are Todays High Net Worth

Ready To Repeat History?

First of a Series

The bear market of recent memory clearly impacted the financial behavior and mindset of the American consumer. This has been documented in many research studies over the past several years, showing consumers had become more conservative in their investing attitudes and less confident in their self-advising abilities. Now that equity markets have rebounded, the proverbial $64,000 question is: Have consumers financial behavior and mentality been altered permanently, or will they return to their bull market ways of the past?

Now in its 5th year, the Phoenix Wealth Survey has established a record of documenting the financial attitudes and behaviors of the high-net-worth market, something very useful for advisors who focus on this niche.

Here are the themes that we see emerging:

Optimism Has Returned. From the data shown in the accompanying display, it is clear positive feelings toward the economy over the short term have significantly improved. This attitude, of course, is always sensitive to events in the external environment. Barring any significant change in the current equity markets or any significant terrorist activity on U.S. soil, this optimism will more than likely continue to increase.

We also see that optimism regarding the economy, in general, has translated into optimism regarding the high-net-worths outlook on personal finances. When placed in the context of the “long term,” however, this turnaround in attitude isnt as strong. This attitude is at about the same level of 2 to 3 years ago when it was declining. Attitudinally, it is as if the clock has been rewound to 2002.

Less Gun Shy About Investing. With high-net-worth consumers feeling more confident about the economy and their own financial future, it is not surprising that they also are feeling more confident about investing. Results show that larger percentages see themselves as “investors” rather than “savers” than was the case last year. There is also an increase in the percentage agreeing with the statement “to make money, I need to take above-average risks.”

The graph on page 34 tells the story better than anything else. When asked which is more important”preservation of my capital” or “return on my capital”it can be seen that return carried the day in the year 2000. These investment priorities crossed in the following year, with the concern for preservation peaking. In 2003, however, the focus shifted back to return. Once again, todays high-net-worth consumers are back to 2 years ago in terms of their investment priorities.

It is speculated that a good deal of this investing aggressiveness stems from a desire to make up for losses in the high-net-worths retirement portfolios that were decimated during the recent bear market. Assuring a comfortable retirement, as well as taking an early retirement, remain as top financial goals of this market. Yet, considering the average consumer in this market is in his or her 50s, time is running out to amass the nest egg required to make this goal a reality.

Lending further support to this hypothesis is the fact that an all-time high percentage of our survey respondents (39%) agreed with the statement “I am very concerned about outliving my money in retirement.” This was up from 32% in 2001. Additionally, over the course of 5 years, there has been a steady increase in the percentage agreeing with the statement “I feel I need to make up for lost time in saving for retirement.” This percentage now stands at 33% compared to 25% in 2000.

Increased Confidence in Investing Abilities. When the bull markets were raging at the turn of the decade, it was relatively easy to make money. While it would be a gross exaggeration to say a majority of the high net worth were operating as “day traders,” still, less than one-third admitted confusion about the best way to invest. This number jumped to almost 50% of the high net worth in 2003 but returned to the 2001 level this year.

Similarly, 53% of the high net worth indicated that they made their decisions regarding money and investments without the help of a financial professional in 2000. This percentage dropped below 50% during 2002 and 2003, and this year crept back to the 50% markapproximately the same level that it stood in 2001.

Declining Knowledge Regarding Finances. Despite their increased optimism about the economy and confidence in their own investing abilities, todays high net worth do not admit to being any more knowledgeable about financial matters, in general, or the stock market specifically. As shown, self-reported knowledge about financial matters has continued to decline over the 5 years of our survey. One explanation is that high-net-worth consumers gauged their financial aptitude based on their results during the bull/bear cycle and have recalibrated their IQs accordingly.

The second part of this article will explore whether this continued decline in financial knowledge is causing high-net-worth consumers to turn to financial advisors for help, and if so, what kind? Will their increasing confidence regarding the economy, the pressure to make up for losses during the bear market and their increased confidence in their own investing abilities cause them to return to their old financial habits? Put another way, will todays high net worth validate the old adage that the only thing we learn from history is that we dont learn from history?

Walter H. Zultowski is Senior Vice President, Business and Marketing Development for The Phoenix Companies, Inc., Hartford, Conn. He can be reached via e-mail at walter.zultowski@phoenixwm.com.


Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 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.