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Wealthy Investors Grow Pessimistic

Poor Performance Raises Many Questions


As the stock market continues to stumble along, high-net-worth investors are becoming increasingly pessimistic about the economy and dissatisfied with the performance of their financial services providers.

"When times are going well, people don't complain about fees, they complain about softer stuff, like how they don't think their adviser is attentive enough," said Walt Zultowski, senior vice president of research and concept development for The Phoenix Companies and author of the "2008 Phoenix Wealth Survey."

"When times are tough, investors tend to complain more about performance, strategies and fees," he said. "They start looking at the advisory relationship through a cost-benefit lens."

Almost everything tends to go down during a bear market, even when you have a good adviser, Zultowski said. Some investors who lost money may be saying, "Gee, I could lose this much money on my own without paying a fee," he said.

Investor optimism is at the lowest level it has ever been in the nine-year history of the Phoenix survey. Given that this year's survey was taken in February and March, before the collapse of Bear Stearns, Zultowski said he suspects the record levels of investor pessimism will continue to increase.

Zultowski was surprised by the high levels of pessimism until similar surveys came out, with every single one of them showing the same thing.

Approximately 50% of high-net-worth investors are pessimistic about the U.S. economy for the next one to two years, compared to a pessimism rate of 30% the year before. About 51% said they were optimistic about the economy in Phoenix's previous survey, in 2007, but that number dropped to 36% in 2008.

"When we started doing research in the late '90s, a bull market was going on," he said. "When we asked people about their primary concerns, it was still retirement, but the big issue was one of taking early retirement. As markets turned bearish, you don't hear about early retirement anymore."

The survey found that high-net-worth investors continue to procrastinate about estate planning, due to the ongoing debate in Congress over what the exemption rate should be.

Currently set at $2 million with a 45% tax on anything over, the estate tax is set to rise to $3.5 million next year, take a year off in 2010, and revert after 2011 to a $1 million exemption, plus a 55% tax on anything above $1 million.

"Estate taxes are not going away," Zultowski said. "I don't see anyone thinking a repeal is out there, especially given budget deficits and the Iraq War."

Many investors are worried about what would happen to the estate tax if a Democrat is elected president, though Sen. Barack Obama has said he wants to set the estate tax at $3.5 million. Sen. John McCain has talked about setting the limit at $10 million, Zultowski said.

Approximately 22% of the high-net-worth and 42% of those with $3 million or more say they have delayed doing any estate planning due to the continuing debate in Congress.

The high-net-worth are not concerned about running out of money, but more about protecting their lifestyle, Zultowski said. They tend to view real estate as an investment and not part of their nest egg, and 49% see real estate as a safer investment than the stock market.

Affluent investors are growing increasingly uncertain about the balance in their investment portfolios, and they may begin to lose confidence with financial providers that can't give them the sophisticated advice they seek, said Ron Shevlin, senior analyst with the Aite Group and author of the study "What's in Your Portfolio? Examining Pre-Retirees' and Retirees' Investment Portfolios."

"We are seeing discontent and unrest among pre-retirees and retirees," Shevlin said. "There is a level of uncertainty over whether they have the right product mix."

Financial services firms are hard-pressed to find an investor who is perfectly content with his or her portfolio, Shevlin said. Among the pre-retirees and retirees Aite surveyed, 98% believe there's at least one instrument in their portfolio that should play a larger role, and 74% said that at least one of the holdings within their portfolio should play a smaller role.

"With so many pre-retirees and retirees of the opinion that their mix of financial products should be scaled differently within their portfolios, engaging these customers and identifying their specific needs should be a top sales priority," Shevlin said. "Financial firms are too parochial regarding the products they push, don't adequately train their advisers and reps, and don't ask the right questions or provide their customers with the right information to make smart retirement investment decisions."

High-net-worth investors are typically more knowledgeable about financial products and have more sophisticated needs than the average investor, he said. When these sophisticated investors turn to financial institutions for help, they often get a limited level of service.

"The more self-directed they are, the more they know when they're getting limited advice," he said.

Even at a top mutual fund firm like Fidelity or Charles Schwab, investors may get a limited range of expertise, depending on who they talk to, Shevlin said. An adviser who is trained to roll over 401(k)s and IRAs may not know to ask about other investments like annuities, savings accounts and other products.

Service-oriented issues are driving turnover at these firms, whether it's an erroneous fee or when an investor can tell that their specific adviser just can't cut it or deliver on their specific needs, Shevlin said. Often, a firm will experience silent attrition, where people don't close out their accounts, but their assets begin to dwindle after they switch primary providers.

"It's pretty bad when the clients know more than the advisers," Shevlin said. "They think, 'Gosh, if you can't manage $50, how will you be able to manage $50,000 or $500,000?' It tends to build up until it becomes the straw that breaks the camel's back."

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