There’s a huge gap between the expectations and behavior of the super-rich and their reality, according to a recent survey of ultra-high-net-worth individuals conducted by SEI and Scorpio Partnership.
The report, “Algorithms of Wealth,” suggests the truly wealthy have a chance to improve their financial position by acting in a strategic manner, which would include building a relationship with a financial advisor, something a majority do not do.
For instance, while the average respondent expected an annual portfolio return of nearly 16%, nearly 60% said they worry about running out of money. The disconnect between seeking high returns (which usually means taking on more risk) and concerns about preserving capital is evidence of the gap.
The disconnect is further evidenced when UHNW individuals profess their expectations that their spending will increase markedly even as they worry about running out of money.
Perhaps most surprising is how far the UHNW individuals feel they have to go to reach their financial goals — they say they need $10.8 million on average.
The UHNW version of the online survey included 275 individuals with an average wealth of $18 million. The broader survey was also conducted online with 1,018 respondents, 510 women and 508 men, all aged 18 or older.
Below are specific ways that the highest-net-worth Americans may be their own worst enemies.
1. Portfolio Growth Expectations
Among the truly wealthy, there’s a noticeable difference in expectations of investment returns depending on their age group.
Those under 40:
- Expect 24% growth in their portfolios in the coming year
Those 40 to 59:
- Expect 14.2% portfolio growth in the coming year
“It is not surprising that investors want to have their cake and eat it, too,” Jeff Ladouceur, director of SEI Private Wealth Management, said in written commentary on these findings. “However, it’s dangerous to become overly focused on double-digit returns at the expense of preservation goals like future lifestyle.”
2. Household Spending
Among all UHNW:
- Expect their spending to rise up to 25% over the next five years
- 18% expect an increase of 25% or more in that time period
Those under 40:
- 22% expect spending to increase 25% to 49%
- 7% expect spending to rise at least 50%
- 44% report running out of money as a concern
Those 40 to 59:
- 82% expect a less than 25% increase in spending
- 65% worry about running out money
(Among the general population, 31% expect spending to increase up to 25% over the next five years.)
Ladouceur noted the “incongrous” differences between expected portfolio returns and increased anticipated expenses. “The same respondents that expect a high rate of return are the same respondents that fear their spending will outpace their returns,” Ladouceur said. “A lack of alignment between portfolio goals and capital uses is clearly evident.”
3. Time Spent Planning Finances
Over all, the UHNW said they spent 15 hours a week thinking about financial goals.
(Eighty percent of those in the general population said they spent less than nine hours weekly thinking about their financial goals.)
The report says that the UHNW “to a degree…remain ‘benchmark focused’ rather than ‘outcomes focused.’”
4. Investing Style
Among all UHNW individuals:
- 38% call themselves self-directed investors
- 23% said they used a financial advisor for only complicated investments
“Again, we see a noteworthy disconnect” among the UHNW in these findings, Ladouceur said. “The wealthier you become, the greater the need for a ‘boardroom approach’ to wealth management,” chaired by one trusted advisor who because they understand the family well can help them meet their goals. “And yet, the survey shows that investors are taking the complete opposite approach,” he said. “Going it alone ensures that you will spend the majority of your time tracking relative performance and not actively planning how to put your wealth to work.”
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