A few months ago, Ian Yankwitt was in his car when he got a call on his cell phone from a client with a multimillion-dollar portfolio who was worried about how her investments were doing after a few rough weeks for the stock market. Yankwitt, president of Tortoise Investment Management in White Plains, N.Y., spent some time reassuring her that because she and her husband had well-diversified investments they were probably running about even for the month, but that he would check back with her when he got to the office.
As it turns out, the problem lay in perception. "She was focusing on one account that was down 4% for the month, but their other accounts were up by nearly as much," he says. "So their entire portfolio was actually down less than 1% in a brutal market. She just needed to understand the real numbers."
A flurry of recent studies of the millionaire investor market by both financial services companies and research groups suggests that phone calls similar to the one Yankwitt received may not be that unusual these days. They reveal that members of the coveted group, typically more optimistic than the broader population, are more concerned about the stock market and the economy than they have been in several years.
Millionaire investors became mildly bearish beginning in March, according to the Spectrem Group, marking the first time they had expressed that level of concern since the firm began tracking their sentiments over four years ago. Another Spectrem study indicating that the number of U.S. households with a net worth of $1 million or more rose just 2% in 2007, its slowest pace in more than five years, raised concerns about the sluggish growth of the millionaire market and the possibility of flat or even negative growth in 2008. "The substantial gains in the number of millionaire and ultra-high-net-worth households we've seen since the end of the dot-com bust has all but ground to a halt," warns George H. Walper Jr., president of Spectrem Group, in a press release.
Other reports have reached similar conclusions. The Fidelity Millionaire Outlook 2008, released in May, indicated that millionaires' overall current view of the U.S. economy is "very weak," down from a strong level of confidence a little more than a year ago. According to American Express' Annual Survey of Affluence and Wealth in America, nearly 80% of affluent Americans believe the U.S. is in a recession.
With millionaire clients sweating a little more than usual and growth in their ranks stagnating, financial advisors serving that market need to put the focus on keeping things upbeat, staying in touch on a regular basis and presenting opportunities, according to Katia Walsh, vice president at Fidelity Institutional Wealth Services.
In 2001, financial services companies reached out to millionaires by speaking to their fears that their stock market gains would be wiped out, and so promoted shifts to more conservative investments and cautioned sitting tight, says Walsh. While such an approach might work with the average investor, she notes, "it probably won't sit well with wealthier clients. You have to appeal to the opportunistic side that helped make them millionaires in the first place."
Walsh points out that while millionaires are showing some pessimism about the financial markets this year, many foresee a turnaround at the beginning of 2009, and more than one-quarter are planning to increase their exposure to stocks in the coming year. Because of this, well-researched equity "bargains" might sound interesting to them, she says. Slightly more than half of the respondents to the Fidelity survey thought there were likely to be significant increases in taxes on income, capital gains and dividends, so discussions about tax savings and tax-advantaged investments are also likely to be well-received.
Schwab Institutional's David Welling, a vice president who works in marketing and advisor relations, believes that angst among high-net-worth clients may not be as prevalent in the millionaire market as some surveys suggest. "Our research indicates that only 18% of advisors said their clients were coming to them for reassurance about the markets," he says. "That's a good number, but not the overwhelming majority."
Still, Welling says he has "heard from some quarters that there is more anxiety about reaching long-term goals," even among the high-net-worth crowd. "In this kind of environment, advisors definitely want to be communicating on a regular basis," he says. "That may include regular meetings, phone calls-initiated by the advisor rather than the client-newsletters or client education events."
Yankwitt typically sends out quarterly statements detailing all of a client's accounts with his firm, rather than a more traditional separate account statement, so the clients can see how their portfolios are doing as a whole rather than focus on their best- or worst-performing ones. The phone call he got in his car prompted him to send out a special aggregate statement accompanied by a letter to clients after a particularly tough month for the stock market. "The letter basically said that, in light of recent market volatility, I felt it was appropriate to send a snapshot of how their accounts did and to tell them that if they wanted to communicate about anything, to give me a call," he says. "I think it's important to provide a more rational voice than the hysterical guy on television." A couple of clients responded with appreciation for the unscheduled update, and a few said they would be interested in stock market "bargains" should the opportunities present themselves.
Millionaire clients, who have often taken risks to get where they are, sometimes bring that mindset to the investment table, says Yankwitt. "I ask them if they would be prepared to lose 10% of their portfolios in a given year. If they say they would, I talk to them about how much that represents in dollar terms, which often causes them to step back. These people are already where they want to be financially, so I view my job as protecting their wealth. There's no need to shoot for heroic returns."
Norm Mindel, a financial advisor for Genworth Financial, says that one of his clients wanted to put his portfolio into cash during the credit crunch earlier this year. In situations like that, he says, "I sit down and point out that I could put them into money market funds, but at today's rates they would lose money to inflation and taxes. The other choice is to take some risk and get through these markets."
He also tries to take a proactive approach by calling all of his 130 clients every quarter, holding an annual client appreciation dinner and sending out a quarterly newsletter. (The last issue pointed out that the stock market rose during five of the last ten recessions.) And branching into areas beyond money management, such as estate planning, helps shift the focus away from day-to-day market volatility, cement relationships during tough times and generate referrals. "In an age of instantaneous information where everyone is focused on the next 24 hours, there has to be someone there to put things into perspective," he says.
Some advisors have made fairly sweeping changes in response to volatile markets. At Financial Advantage in Columbia, Md., senior advisor Lyn Dippel introduced a major shift by phasing out her traditional buy-and-hold stocks and bond strategy with a more active one that emphasizes capital preservation can keep portfolios in positive territory under a variety of market conditions. She instituted the change in response to heightened market volatility. Also, her clients, who are mainly retirees or individuals nearing retirement that have investment portfolios in the $1 million to $7 million range, wanted to preserve what they have accumulated rather than aggressively grow their portfolios.
Dippel shoots for a 7% absolute return, regardless of market conditions. "If the stock market is up 15% to 20% in a given year, we may be up about 10%. If it's in negative territory we may be up 5% or so." Her clients, she says, are happy to sacrifice shoot-the-lights-out returns for greater consistency.
She no longer seeks broad market exposure through ETFs or mutual funds because she believes stocks as a whole are overvalued and that broad investment classes such as U.S. and international stocks, small caps and large caps move in lockstep. Her bond investments have been largely replaced by cash investments and high-dividend stocks, and she uses more targeted opportunistic investments such as individual stocks and sector funds, as well as hedge investments such as inverse-index funds.
She trades more frequently to take advantage of market volatility and to make money in sideways markets, and she communicates with clients about what she's doing via e-mail "investment alerts" that include a link to a portion of her Web site that briefly explains why she has executed a particular trade. "It helps to settle their minds about what I'm doing and lets them know that I'm staying on top of things," she says.