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The De-Wealth Effect


For years, Americans enjoyed the "wealth effect," the sense that their assets were gaining value rapidly enough that they didn't have to save much. This perception of ever-expanding prosperity gave them freedom to spend lavishly and enjoy life. The effect was a function of feeling wealthy as well as being wealthy.

Well, that was then. Since 2008, Americans have endured a de-wealthing, so to speak, as the value of their assets plummeted and many jobs disappeared. Those who can are saving like crazy.

Interestingly enough, this sense of de-wealthing also applies to high-net-worth and even ultrahigh-net-worth clients. Even for those who used to have $40 million and now "only" have $20 million, the loss is genuine-and so is the emotion.

"You've heard of nouveau riche; this is nouveau middle class," said Craig Stearns, senior vice president of Lenox Advisors in Stamford, Conn. "It's not simply underperformance. People who thought they were immune now feel vulnerable, like they have to pay attention." Stearns' clients, many of whom work in the financial industry, have seen their deferred comp and stock grants shrivel along with their personal portfolios-and in many cases, their bonuses and salaries.

Even though they're still relatively rich, Stearns said, "pulling back on consumption is the style right now."

Phoenix's annual wealth survey, interestingly enough, was put into the field at the perfect time to capture the wealthy's dismay. In February, pollsters contacted 1,735 high-net-worth households, defined as owning assets worth at least $1 million, not including the primary residence. This is the 10th anniversary of the wealth survey, so it now chronicles investors' reactions to two bears: the first in 2000 to 2002, and the second going on right now.

What's most interesting, pointed out Walter Zultowski, senior vice president, research and concept development at Phoenix, is that the wealthy seem to serve as a leading indicator. "These are smart people," he said. "They're an important group to watch because they have a pretty good read on the environment in the near future."

Down the Wealth Ladder

In both 2002 and 2008, the number of millionaires shrank sharply. People fell out of the high-net-worth category, but remained among the affluent-as Zultowski describes it, they've "dropped down a rung on the wealth ladder." Whereas in 2007, market research firm TNS counted 9.9 million millionaire households in the U.S.-an all-time high-in 2009 this number fell back into the five to six million range, Zultowski estimates.

That's roughly the same number of HNW households as there were in 2002, during the last bear market. But the number of HNW families with $5 million net worth or more grew from 2007 to 2008, and Zultowski guesses that their numbers haven't changed much since then.

Nevertheless, the wealthy feel less affluent, in significant numbers. In the 2009 Phoenix survey, 74% of HNW respondents reported feeling less wealthy than they had the year before. No surprise there. By the time the survey was fielded, Bear Stearns and Lehman were history, and the market had endured months of free fall. "Pessimism was at an all-time high, even though this group is by nature pretty optimistic," Zultowski said.

How do these concerns play out with individual clients? "Reluctance to pay capital gains has been replaced by concern about concentrated positions," Stearns said. "The tax tail is not wagging the investment dog. Of course, we can move things in a way that minimizes the tax liability," but investors are now most interested in diversified portfolios that hedge their risk.

Learning from Bears

There's a huge message for fund companies and financial advisers' in millionaires' reaction to the bear market, Zultowski noted. Even though many derive their wealth from companies they own-a whopping 33% of HNW households own businesses-the market's fall and subsequent economic turmoil has them very concerned about the future.

"This year dwarfs other years in bearishness," he said.

For example, 59% of respondents in the 2009 survey described themselves as pessimistic about the economy over the next one to two years, versus 50% who were pessimists in 2008. This a sharp jump from previous years; in 2002, despite a terrorist attack and a bear market, only 14% of respondents called themselves pessimistic. What's more, the percentage of HNW households that describe themselves as pessimistic about their personal financial future jumped to 30%, nearly double the 16% who were down on their future in 2008.

In addition, although the perennial primary retirement goal for HNWs is comfort (41% of respondents), this year, not running out of money inched closer (25%), and 40% say they are concerned about outliving assets. More HNWs put financial and estate plans in place over the past year, but the number of HNWs who lack a primary financial advisor-36%-is still high, and represents a big opportunity for planners who are attuned to the psychology of the moment.

Of those who do have a primary financial adviser, 16% are not satisfied with the services they're getting. Among those who are looking for a new adviser, 37% complain that their old adviser was not sufficiently proactive about staying in touch during the downturn, and 27% say they didn't like the adviser's company-a shot across the bow to Wall Street.

The de-wealth effect plays out in HNWs' attitudes toward investing, too. Fifty percent of respondents report that they've become more risk-averse in the last 12 months; the same number report that lately, they've become confused about how best to invest. This is almost the same number as reported that they were confused about investments in 2003 (47%).

Considering the timing, you might see this bearishness as a buy signal. It seems that the wealthy themselves feel this way, the survey reports. When asked which products they were interested in buying within the next three years, 34% said stocks-the highest number since 2003, when 49% were lusting after equities.

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