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Financial Planning > Charitable Giving

No More Mr. Nice Guy

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For me, one of the most gratifying benefits of having been around the financial advisory industry for a long time is when old friends do something particularly noteworthy. The new book, The Middle-Class Millionaire: The Rise of the New Rich and How They are Changing America, by Russ Alan Prince and Lewis Schiff, is an excellent example.

I’ve known Russ Prince for close to 20 years, have always admired and respected his research, and even worked with him a while back on a white paper publicizing his ground-breaking data on client-oriented advisors. Lewis Schiff and I worked together at Worth magazine in the early ’90s, and I followed with great interest his best-selling book The Armchair Millionaire and Web site of the same name that created a national sensation.

A couple of weeks ago, these two pals asked me to write a blurb about their new book, which I found to be a must read for investment advisors (and anyone else) who wants to understand the growing class of self-made millionaires who, according to Prince and Schiff, are changing the consumer markets and indeed the American economy. More to your interests, they also happen to be the target market of many independent financial advisors. The authors were also kind enough to send me a copy of a study they created by segmenting the middle-class millionaire advisors in their data, to determine how those advisors got that way. I found the results of this study as troubling as I found their book inspiring (an excerpt of said study can be found on in the article “Like Client, Like Advisor”).

In The Middle-Class Millionaire, Prince and Schiff purport to have uncovered the rise of new class of wealth that is changing the face of America: “These 8.4 million households [with $1 million to $10 million in net wealth] make up a new generation of millionaires who began to emerge from the middle class in the late twentieth century…As their wealth has grown, so have both the cost of maintaining their lifestyles and their need for products and services that make their lives run smoothly. Now, through the influence of their affluence, this group is helping to bring about momentous changes throughout American society.”

It’s a little unfortunate that the authors don’t reference the work of Dr. Tom Stanley, formerly of Georgia State University, whose book The Millionaire Next Door published in the late 1980s, became the bible for independent advisors trying to move “upscale” and attract the working-class affluent as clients. But it’s undeniably true that today’s working “millionaire” identified by Prince and Schiff is vastly different from those uncovered by Stanley some two decades ago.

Stanley’s millionaires were almost retro-middle-class, even for the ’80s. They owned and operated small businesses–dry cleaners, gas stations, or cement companies. They stayed married to their wives, drove non-descript station wagons into the ground, bought their clothes more often off the shelf than off the rack, and went to church. They worked hard, sent their kids to college, avoided debt, and saved their money. In a word, they were the total opposites of the 1980s’ high-flying executives–overspending, conspicuously consuming individuals that many financial advisors thought were their target clients. Tom Stanley set them straight.

But a funny thing happened over the past 20 years. The Reagan/Bush/Clinton/Bush economic boom (undeterred by the bond and stock market corrections of ’87, the recession of ’92, or the crash of 2000), fueled by low interest rates, low taxes, and almost non-existent inflation has, among other things, replaced Tom Stanley’s retro millionaires with a new generation of small business owners who are, if anything, more driven to attain success, far more socially liberal, and cutting-edge consumers of the first order. Prince and Schiff’s book is a study of what it takes to get into that class today.

The Four Horsemen

I won’t go into the details of today’s working millionaires–I have bigger, more industry-focused fish to fry. But in short, the authors identify four characteristics that dramatically separate today’s middle-class millionaires from their less successful classmates:

Hard work. While nine out of 10 of respondents to Prince and Schiff’s survey believe that “anyone can become a millionaire if he or she works hard enough,” the average middle-class head of household works 41 hours a week while the average middle-class millionaire puts in 70 hours. The millionaire is also five times more likely to be “always available” via e-mail (76% vs. 16%), four times more likely to work nights (52% vs. 12%), and three times more likely to be in the office or store on weekends (67% vs. 21%).

Networking. Although most middle-class millionaires dislike the smarmy connotations of the term, 62% of them believe knowing many, many people is very important to achieving financial success (vs. 43%), and they are three times as likely to cite networking as a way to connect with people they can turn to for information (83% vs. 29%).

Never giving up. Nine out of 10 of all middle-class survey respondents admitted to having “made a major career or business decision that had a very bad outcome,” but middle-class millionaires averaged 3.1 such incidents vs. 1.6 for the rest of the middle-class. More importantly, the millionaires were five times more likely to follow up a bad business outcome by trying again in the same field, rather than changing fields or focusing on other projects (77% vs. 14%).

Going where the money is. Eighty percent of middle-class millionaires either own their own businesses or are in professional partnerships. In fact, two out of three of them (65%) consider an ownership stake to be “very important” to financial success, vs. just 28% of other folks in the middle class. That pretty much says it all.

The MCM Advisor

As inspiring as these hardworking/networking/never-say-die/business owners are, when Prince and Schiff turn the spotlight on the portion of them who are advisors, the picture gets somewhat darker, at least for me. It’s important to note that while the authors’ data included 536 “investment advisors,” they went on to point out that number was important “so that the sample would accurately reflect the makeup of the nation’s approximately 500,000 licensed financial advisors.” The point is, we’re not talking about RIAs here. This study apparently reflects the attitudes of “advisors” at brokerage firms and independent broker/dealers.

Still, with the drive for ownership just as strong with advisors as with other middle-class millionaires, it seems reasonable to assume that a substantial portion of these “licensed financial advisors” are indeed registered reps with independent broker/dealers. But as Schiff and Prince found with today’s millionaires themselves, today’s independent advisors appear to be a far cry from the independent advisors of 20 years ago.

Consider these findings. Today, 15.8% of investment advisors are middle-class millionaires (with net worths ranging from $1 million to $10 million), leaving 84.2% of advisors “aspiring” to be (net worth below $1 million). That 15% shares the same attitudes–hard work, networking, refusing to quit, and emphasis on ownership–that Prince and Schiff found among non-advisor middle-class millionaires.

But they also found a drive to succeed at virtually any cost that, frankly, I’ve never seen in my years observing independent advisors. Their survey showed that middle-class millionaire advisors (compared to those aspiring advisors) believe that to achieve financial success, it’s extremely important to:

  • Do whatever you need to do to win (82.3% vs. 63.1%);
  • Take advantage of weakness in others (63.6% vs. 31.9%);
  • Bend the rules at times (53.1% vs. 35.3%);
  • Be Machiavellian (44.8% vs. 26.4%);
  • Leave a rewarding career to pursue financial success (47.9% vs. 29.9%).

Meanwhile, today’s millionaire advisors don’t believe it’s important to:

  • Put their own capital at risk (26.0% vs. 42.5%);
  • Do what they love and allow the money to follow (1.0% vs. 27.4%);
  • Have a high IQ (29.2% vs. 45.6%).
  • Work with good people (35.4% vs. 67.0%);
  • That negotiations should always be win-win (16.7% vs. 32.2%).

Does that sound like any independent advisors that you know? It seems the booming U.S. economy of the past 25 years or so not only changed the values of investment portfolios; if Prince and Schiff are to be believed, it changed the values of investment advisors.

When I started covering independent advisors back in the early ’80s, virtually all of them could have made more money as stockbrokers or insurance agents, but opted for independence to better serve their clients. It seems that a wealthier investing public, combined with a shift to managing investment portfolios for fees, has not only created a boom for the original independent advisors; it’s attracted a flood of defectors from Wall Street who are chasing today’s better economics and bringing their broker mentality along with them.

While busily trumpeting the victory of independent advice over the Wall Street wirehouses, I have to admit, this is a consequence I hadn’t foreseen: that independent advice would win the battle–and lose the war, as armies of brokers, with their broker mentality, simply went independent, and swallowed the independent movement with their sheer numbers. It’s far greater threat than anything they could cook up inside the Beltway. In fact, it may be the biggest challenge yet for the independent advisory profession to create clear guidelines as to what constitutes a professional financial advisor. That is, if it’s not too late already.

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].


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