August 14, 2000
NEW YORK - The number of penta-millionaires will expand exponentially by 46 percent a year between now and 2004, bringing today's 590,000 penta-millionaire households to more than two million by 2004, according to new research by the Spectrem Group of San Francisco.
The report, "Penta-millionaire Market Research: A Portrait of the Ultra High Net Worth Market," was discussed at a media briefing here July 18. The study was based on 610 questionnaires completed by wealthy households in 17 states in June and July of last year.
Penta-millionaires, those with net worths of $5 million or more, are the fastest-growing segment of the affluent, according to Spectrem. While the ranks of simple millionaires are projected to grow at an annual rate of 13 percent between now and 2004, the penta-millionaire segment is expected to grow at a rate of almost 46 percent per year over the same period.
Spectrem estimates that the penta-millionaire market now includes some 590,000 households with an average net worth of $25.7 million.
The study showed that two-thirds of pentamillionaires are invested in mutual funds, have complex financial needs, are confident about their financial decisions and make heavy use of the Internet. The study found that penta-millionaires like doing their own financial research online and that they conduct an average of six online trades per month.
Spectrem also found that the average penta-millionaire is 62 years of age and married with at least two children. More than half have at least some post-graduate education. A majority are highly involved and confident investors willing to take calculated risks.
Many factors are contributing to the expansion of this group, the study found. Those factors include the aging population, which has pushed more individuals into their peak earning years, the enormous increase in entrepreneurial activity, the portability of retirement plans and incentive-based compensation arrangements, including stock options.
Penta-millionaires are most concerned with ensuring a comfortable retirement for themselves on par with their current standard of living, the study found.
Penta-millionaires have become wealthy largely because of investments, the study found. Thirty-six percent of penta-millionaires' income is derived from stock options, 32 percent from investment income and only 28 percent from earned income or retirement income, according to Spectrem. Forty-two percent of these very wealthy individuals have ownership stakes in one or more businesses.
While penta-millionaires have larger savings than the average affluent investor, they also tend to have a quasi-institutional nature and often have up to one-third of their wealth in illiquid securities such as partnerships and stock options, said William R. White, practice leader for affluent market consulting at Spectrem.
Penta-millionaires are very active purchasers of investment products, Spectrem found. While the majority of high-net-worth investors allocated the largest portion of their investment dollars to individual stocks and trust accounts, two-thirds of those surveyed had mutual fund investments. And, of that group, the average mutual fund investment was $2.5 million.
Ninety-five percent had retirement accounts and these accounts had an average of $3.8 million in them. More than 75 percent of all penta-millionaires had insurance of some kind, including annuities, and the average worth of their policies was $2 million.
While penta-millionaires clearly like mutual funds, they are increasingly gravitating towards alternative investments, the study found. Spectrem's research indicated that four percent of the broader high-net-worth group maintains investments in alternate investments such as hedge funds, private placements or venture capital. However, penta-millionaires have between 10 percent and 40 percent of their assets in each of these alternative investments, according to Spectrem.
The very wealthy like the challenge and the payoff of alternative investments, said Steve Wesson, managing director and head of the private equity group at The Auda Group in New York, an international investment advisor that specializes in alternate investments for wealthy families and institutions with a minimum of $5 million.
The wealthy will often seek out hedge funds or private equity investments, Wesson said. Many of these wealthy individuals understand private equities and investing in rapidly-growing private companies because they have been entrepreneurs themselves, Wesson said.
"People are looking for ways to add value above an index," said Wesson. "That's what makes the mutual fund industry nervous. People want to diversify."
To capture the attention of these wealthy individuals, mutual fund companies need to change, said White of Spectrem.
"Direct mutual fund companies are moving pretty aggressively to add services," he said. Many are now offering separate account management, exchange-traded funds, hedge funds and trust company services, he said.