Even America’s millionaires are now concerned about inflation’s corrosive effect on their nest egg, according to a new report. The results of the 9th annual Phoenix Wealth Survey stand in stark contrast to a 2007 survey from The Phoenix Companies, Hartford, Conn., which found record-high levels of optimism among the country’s millionaires.
“Our survey findings weren’t surprising given what’s going on in the economy,” says Walter Zultowski, a senior vice president of research and concept development at The Phoenix Companies. “What is surprising is depth of the decline among those who reported feeling wealthier. It’s the lowest number we’ve seen in the 9 years of this survey.”
More than 1,900 people with $1 million or more in net worth (excluding their primary residence) were polled for this year’s survey by Harris Interactive. Boomers between the ages of 46 and 54 and between 55 and 64 constituted more than 4 in 10 (42%) of the respondents.
Reflecting a heightened level of concern, there was a significant drop in how people perceived their financial situation. Just 54% of respondents reported feeling wealthier in 2008, a significant decline from 81% in 2007. Only a quarter said they are “very optimistic” about their financial future, a 9-percentage-point drop from last year.
The majority (58%) also say the U.S. economy is in a downturn and the worst is yet to come.
More people appear to be scaling back their expectations for retirement. When asked to describe how much of their income would constitute a “comfortable standard of living in retirement,” 62% say less than 100% of their current income, an increase of 10 percentage points from 2007. Just one quarter say it is 100% of current income. Those figures, says Zultowski, are in line with ones from 4 years earlier, when the U.S. was coming off the last bear market.
Lowering expectations doesn’t diminish ongoing concerns, however. Forty percent of the high-net-worth individuals polled worry their assets will be depleted too quickly or they won’t be able to live comfortably on their retirement income, compared with 36% last year.
Inflation fears, as well as investment performance worries, are stoking those concerns. Half say they are worried that inflation will erode the value of their income (up significantly from 42% in 2007), and 39% fear diminished assets due to poor investment performance, an increase of 6 percentage points.
“What most concerns respondents this year are those things that can erode their retirement nest eggs, such as inflation and poor investment performance,” says Zultowski. “During the last several years, the big concern was unforeseen health care costs, which is still up there. But it didn’t jump up from last year.”
Most wealthy consumers (89%) who have a primary financial advisor report are satisfied with their advisor. More than half (56%) have been with the same advisor for 6 or more years and just 8% say they will be looking for a new financial advisor in the next 12 months.
Yet, the survey found that many millionaires are financial lone rangers. Half of those polled–up from 45% in 2007–say they “rarely seek professional advice when it comes to making major financial decisions.” And a record high 41% indicate that they currently do not have a primary financial advisor.
According to Dr. Zultowski, it’s not because they feel fully confident in their own abilities. Almost one third (32%) agreed strongly with the statement, “Lately, I’ve become confused about the best way to invest my money.” In 2007, just 26% confessed to feeling confused about investing.
“What we’re now seeing is a turning back to ‘do-it-yourselfing,’” says Zultowski. “During tough economic times, respondents are more likely to cite fees as the primary reason for not consulting with an advisor. They apply a cost-benefit analysis to the advisor relationship.
“The message for advisors is that they need to better manage client expectations, and they need to add value to the relationship by providing services beyond simply investments,” he adds. “The last thing you want to do is to commoditize the relationship, which in this economic environment is a losing game.”
Forty-two percent of those looking for a new advisor cite “investment returns less than expected” as a reason. Almost one third (31%) say fees are too expensive, a huge jump from 2007 when just 8% cited fees.
In one of the survey’s counterintuitive findings, respondents expressed confidence in real estate. One likely reason: high-net-worth individuals view real estate more as an investment and not as part of their retirement nest egg. Nearly half (49%) see real estate as a safer investment than the stock market, and 45% see it as a better investment than the stock market.
Still, there is some agreement that real estate may play a less prominent role in creating wealth in the future. While 60% of respondents say real estate investments played a “very significant” or “significant” role in the growth of their current wealth, just 36% see it playing a substantial role in creating their future wealth.
One effect of the economic downturn appears to be a renewed focus on financial and estate planning. Although 22% of high-net-worth individuals (and 43% of those with $3 million or more in net worth) say they have put off or delayed doing any estate planning, more than half (especially the wealthiest individuals) indicate that estate planning is more important than ever before. This increased interest in estate planning, says Zultowski, may be spurred by the approach of 2010, when current federal estate tax laws will change unless Congress acts to extend them.
Fifty-nine percent of respondents say they have an estate plan, although current economic conditions don’t appear to be a meaningful trigger. Just 6% say their plan was put in place in the last year, down from 9% in 2007.
Written financial plans, however, are much less prevalent. Just over one-third have a written plan while 61% do not. However, just 3% say written financial plans “weren’t at all important.”