The affluent may have significant assets, but that doesn’t make them immune to economic chills. Even if retirement savings are in the multiple millions, affluent retirees and near-retirees will at least feel the shrinkage in their portfolios emotionally when they see a one-third drop in asset levels in a single year. And while they remain far more secure than those middle-class homeowners rocked by the mortgage crisis, the affluent might adjust their habits relative to their expenses and spending habits in the face of such shaken confidence. Advisors with high-net-worth clients know that they need to remain responsive to the advanced-planning needs of families undergoing a true economic transition, as well as those with an exaggerated concern given the relative stability and size of their net worth.
Feeling the Impact
Some high-net-worth families have felt the very real impact of a change in fortune. A former hedge-fund manager who made the transition to commercial real estate, for example, is feeling the pinch of harder times in a soft real estate market. He’s currently trying to sell his 9,000-sq. ft., six bedroom home in one of Long Island’s plushest towns for $7 million. He’s cut the price twice in the 12 months the house has been on the market. He’s also thinking about buying a hybrid to drive instead of choosing one of his two Mercedes in the four-car garage.
During an economic slowdown, even wealthy clients can feel less confident about their near-term financial condition and longer-term retirement standard of living. Studies show that even the wealthy who can easily write checks for coverage are concerned about the cost of medical care during their senior years.
On their own, many clients take a fresh look at their formal financial plans in search of reassurance. Tough economic times can also cause some clients to rethink their relationships with their advisors–and whether they’re getting value for the fees they pay. This is the time to show your value and the value of an advanced planning team. It’s an opportune moment to strengthen your relationships with clients by reviewing plans and adjusting them as needed. According to research from Prince & Associates, Inc., investment advisors who maintain regular contact with their clients fare better in terms of client retention and new assets than those who avoided communicating bad news.
The recent 2008 Phoenix Wealth Survey tracked a clear difference in the attitudes of affluent investors between 2007 and 2008. This year, 50% of the survey respondents expressed pessimism about the nation’s economy, the highest level since 2001 when the question was first asked. The survey found that respondents (more than $1 million net worth minus primary residence) are feeling less financially secure this year than last (see table on next page).
Interestingly, the study also showed that HNW investors with a net worth of $5 million or more felt estate planning was much more important now for someone at their level of wealth than in the past. With the still surprisingly low number of the affluent who have current, comprehensive financial plans, this finding would indicate a potential opportunity for advanced planning teams to provide necessary services. Given the national debt and the political climate, a complete, permanent repeal of the estate tax appears unlikely. If Congress doesn’t act before 2011, the estate tax exemption reverts to $1 million and the maximum estate tax rate becomes 60%.
The HNW Take a Tougher Look at Investing