Even Affluent Clients Feel the Chill

The wealthy thought about their investment strategies differently, too. Last August marked the beginning of a slowdown for all for high-net-worth and ultra-high-net-worth investors, according to the 2008 World Wealth Report by Merrill Lynch and Capgemini. According to the report, HNW investors worldwide in 2007-2008 moved to less risky and more familiar investments:

• HNW investors moved to safer investment categories, with cash/deposits and fixed-income securities accounting for 44% of HNW investor financial assets, up nine percentage points from 2006;
• Fixed-income securities saw a 6 percentage-point increase in asset allocation, accounting for 27% of holdings, up from 21% in 2006. North American HNW investors allocated 29% of their holdings to fixed-income securities;
• Globally, HNW investors continued to decrease their holdings in North America;
• HNW investors showed greater interest in domestic market investments, preferring more familiar grounds amid heightened levels of economic uncertainty.

Beyond the appropriate asset allocation to withstand some stormy economic weather, preparing clients emotionally for reasonable expectations is the key to reducing the number of frantic phone calls. A very robust spending habit supported by a few years of 10%-plus portfolio growth can prove a hard addiction to break.

A new book from Merrill Lynch and Capegemini, Wealth: How the World’s High-Net-Worth Grow, Sustain, and Manage Their Fortunes, examines the data the team collected and analyzed about the global wealth management market, clients, and prospects.

A number of investment behavior trends and habits of the wealthy are listed below.

• International Investing Emerging markets hold greater interest and opportunity at the same time as they help to globalize portfolios to better withstand regional downturns.
• Wealth Transfer The old etiquette of silently transferring wealth to children while offering few details–and the avoidance of any discussions of money at all, has faded with the need to educate the children of the wealthy to become better managers of their inherited assets.
• Philanthropy Donations by HNW investors rose to $285 billion dollars in 2007, as did the degree of personal involvement (not just check writing) and the expectation of recipients to report on results in greater detail.
• The Internet, Technology, and Self-Education Affluent clients are increasingly using the Internet and technology to manage investments and research on their own. The result is a more demanding, informed client than seen in previous generations.

Changing Luxury Spending

The biggest challenge for some retailers and manufacturers of high-end luxury goods is self-image in a time of economic difficulty for many U.S. citizens, according to an article in the Wall Street Journal (“Luxury Goods Weathering Economic Woes in U.S”, July 28). Marc Cohen, director at Ledbury Research, a London-based luxury consulting firm, notes that wealthy Americans in particular are now more cautious about projecting conspicuous consumption, even if they have the potential for big budget shopping. “We’re seeing more comments about, ‘I feel bad about spending,’ when there is so much negative economic news,” he observed.

Growth in sales of luxury goods in North America slowed to 2% last year, according to consulting firm Bain & Co. And investors responded with caution as luxury stocks fell 13% between the end of May and the beginning of July, according to Savigny Partners LLP, a luxury-goods advisory firm based in London.

Where the affluent are spending their discretionary dollars is shifting in response to local economic conditions around the world. While Ferrari, for example, reported high growth in the emerging markets of Asia and the Middle East, the U.S. and German markets–which historically consumed the largest portions of the auto maker’s output–showed much more modest single digit growth, according to the 2007 annual report.

By contrast those high-ticket items with an investment dimension, such as art and collectables, have remained steady or have grown in the U.S. American art collectors have actively participated in important auctions. At Christie’s November 2007 auction of post-war and contemporary paintings, Americans bought 50.8% of the art, while at previous-year event they bought 48.5%, as noted in the 2008 World Wealth Report. While a lower end luxury watch costs about as much as a Toyota Prius, affluent collectors have pursued the exclusive and limited edition models from Patek Phillippe and other makers. Patek Phillippe, in fact, expects to sell out of its entire inventory for the year in the U.S., reports the Wall Street Journal article.

“We used to think in terms of hedge funds when targeting new customers,” says David Norman, worldwide co-chair of Sotheby’s Impressionist and Modern Art Department in the Wall Street Journal. “Now, we look for barrels of oil.”