Big concerns are advisor integrity and accounting scandals.

For many top financial advisors, job one is knowing what their affluent clients are thinking-and fretting-about. Without touchpoints, as our research has demonstrated again and again, the client/advisor relationship can wither.

To get an update on the mindset of the wealthy, we recently conducted a survey of affluent investors. We found out how they felt about such issues as the still-declining stock market, the murk of corporate accounting scandals, the continuing threat of terrorism and the prospect of war with Iraq. We also wanted to see how those investors were feeling about their financial advisors.

We found that, despite the understandable disappointment of yet another down year for the stock market, the respondents' short-term outlook was fairly bright and their long-term take was, across all of the issues, even more optimistic. One concern was troubling, however-doubt about the integrity of financial advisors.

Who We Contacted

During the fourth quarter of this year, we surveyed 123 high-net-worth investors. More than two-thirds of the respondents, 78.3%, had from $1 million to $2 million in investable assets, while 15.0% had more than $2 million and the remaining 6.7% had from $500,000 to $1 million. They were mostly older investors, with nearly half (49.6%) over 66. Another 36.6% were 56 to 65 and 13.8% were 46 to 55. The vast majority of the respondents, 81.3%, were male, and most of them had either two (48.7%) or three (42.3%) financial advisors.

We asked them how their investments had been impacted by the state of the stock market, the economy and the world (Exhibit 1). We also wanted to know where they thought the stock market would go in 2003 (Exhibit 2). Finally, we asked them which scenarios they were most optimistic about, both in 2003 and three-to-five years down the road (Exhibit 3).

What They Told Us

The top two issues that affluent investors were "very concerned" about-and the only ones that were mentioned by more than half of the respondents-stemmed from this year's wave of corporate accounting scandals and the continuing news of questionable activities by analysts and advisors.

It's safe to say, however, that allegations alone are not responsible for two-thirds of the respondents questioning the integrity of financial advisors.

Part of the issue stems from their dotcom hangover and the general recasting of the relationship between investors and financial advisors toward a more consultative model. That is, some investors are probably still smarting about the "hot" tech stocks that their advisors promoted back in 1999 and 2000, feeling that those advisors may have put a sale above the relationship. Not coincidentally, as our other recent studies have shown, those advisors who have broader relationships and who have been most proactive in contacting their clients are the ones who suffered least during the downturn when measured by assets under management and referrals.

The market and the economy were the two other concerns most often cited. It's worth noting that while nearly half of the respondents thought the bear market was going to be with us for a while, and a slightly smaller percentage were worried about an economic "double dip," only 2.4% were very concerned about the possibility of a stock market crash.

Toward the bottom of the list of concerns were Social Security and a war with Iraq. The low rankings don't mean that the affluent were unconcerned or oblivious about these issues; they simply didn't believe that they would have much of an impact on their investments.

Whence The Market?

We then asked our respondents a far narrower question: Will the stock market go up or down in 2003? The answer was a dead heat, with 39% saying it would go up and the same percentage expecting it to go down. The other 22% thought that the stock market would pretty much hold its ground.

These percentages stand in contrast to those of a similar study conducted in the latter part of September 2001. Back then, with the attack of September 11 still very much in the news, we asked the same question of 417 investors with more than $1 million in investable assets. While just 2.4% thought the stock market had hit bottom, 74.3% nonetheless thought it would go up in 2002 and 89.4% said they didn't expect to see double-digit growth for several years.

In last year's study and this year's, there was one constant: Clients who were more regularly contacted by their advisors in person or over the phone were uniformly more optimistic about the market, the economy and their relationships with their advisors.

Looking Ahead-And Beyond

Finally, we asked the investors what they were most optimistic about both in 2003 and three to five years from now. (Note that in this exhibit, the higher the percentage, the more optimistic the investors are.) The good news was that, without exception, their outlook for the longer term was more positive than it was for 2003, in some cases dramatically so.

The issue they were least confident about was the state of the financial and investment markets, with no one expecting much in 2003. The respondents were similarly downbeat about the U.S. economy as a whole; even in the longer term, only about one in five was optimistic. And they were particularly pessimistic about their retirement plans. That may be because this is an older group of people, by and large, for whom retirement is nearer. Or it could simply be because they have almost certainly seen the value of their investments shrink of late, possibly obliging them to pare their retirement plans.

While there was concern in 2003 for regulatory agency activity and corporate reporting, the respondents were confident that those issues would be sorted out in the longer term.

The issue they were most optimistic about was taking care of their family's education, either because they were old enough that their kids had already graduated from college, or because they had squirreled away enough in 529 and other tuition savings plans to cover the educational costs.

As a group, they were very pessimistic about their jobs and careers over the next 12 months, though this issue also showed the largest increase in confidence between the short- and long-term numbers with a leap of almost 75 percentage points. The best explanation may be that although the current environment may place their jobs in jeopardy, there would likely be more stability and security around both employment and compensation in the future.

Last, there was the view on investment performance. Only about one in four thought that their portfolio would do well in 2003, showing just how far investors have come down in their expectations since the stock market peaked in early 2000 and even from this time last year. Even in 2005-2007, however, only just over half of the investors were optimistic about their portfolios, indicating that a sense of reality and perspective may have taken firm hold: that portfolio growth is not a given.

Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.