We stand on the brink of a wealth boom spearheaded by a new breed of high-net-worth people, argues Lewis Schiff, and advisors who attract and retain them as clients will increase their chances of success. Schiff's column in Investment Advisor and his public blog below will explore the behavior and expectations of this group of potentially lucrative clients. To see if you qualify for admittance to a private forum in which advisors who already serve such clients will interact, please click here.
A few weeks back, I posted a blog installment on the future prospects of luxury spending in times of economic uncertainty or recession. Our survey of Middle-Class Millionaire households drew a distinction between “luxury discretionary spending” like jewelry, watches, and other cultural ephemera, and “values-based spending” that reflects the middle-class perspective of the working wealthy, such as charitable giving.
In a recent survey, we looked at that distinction more closely. It shows that the self-made wealthy will continue to spend on travel and their homes, and will pause, but not cancel, other luxury spending.
According to our recent survey, just over 77 % of America's Middle Class Millionaires, those with a net worth between $1 million and $10 million that they have earned, rather than inherited, say that a recession is imminent. Further, an overwhelming number of them, 93%, do not believe the government will offer relief or a significant bail out plan.
Russ Prince and I recently conducted a new study about how households with a net worth between $1 million and $10 million, who we call “Middle-Class Millionaires,” (www.middle-class-millionaire.com) feel about the economic climate and offer some insight into the impact it will have on their spending habits.
Between January 10 and January 18, 2008, we surveyed a random sample of 338 Middle-Class Millionaires throughout the nation and here's a summary of what we found:
The good folks at KeyBank brought me down to Ft. Lauderdale a few weeks ago to attend the International Boat Show. Over one hundred thousand attendees attend this event each year, bringing in more revenue for Ft. Lauderdale than even the Super Bowl.
From KeyBank’s perch in “Mega-Yacht Row,” we had an up-close view of personal luxury yachts that ranged in cost from $6 million to more than $25 million and up and ran upwards of 160 feet. The term mega-yacht isn’t really sufficient though when describing the new up-and-coming yachts that are well past two hundred feet and can run higher than 400 feet. For these vessels, the industry has introduced the term “Giga-Yacht.”
While at the show, I also learned about “shadow yachts.” These are second boats that follow the first boat and contain all the toys the yacht owner could want, from cars and motorcycles to helicopters and speedboats. Shadow yachts also contain beauty parlors, additional storage space and room for additional staff, including security teams.
In my last blog post, I addressed the issue of wealth and race. In this post, I thought I’d take on a slightly lesser charged issue: wealth and religion.
Forgive me for so blatantly putting my head under the guillotine—I mean no harm. I’m just trying to follow the trail of affluence in our modern society. Also, a little bit of data makes me brave, perhaps a bit dangerous.
To wit: While surfing Pew Research’s Web site for data about race and money, I stumbled upon this report: “World Publics Welcome Global Trade—But Not Immigration.” The report considers how the populations of various nations view economic globalization.
As I skimmed the summary, I was stopped by this paragraph:
“The survey finds a strong relationship between a country's religiosity and its economic status. In poorer nations, religion remains central to the lives of individuals, while secular perspectives are more common in richer nations. This relationship generally is consistent across regions and countries, although there are some exceptions, including most notably the United States, which is a much more religious country than its level of prosperity would indicate.”
The Pew Research Center recently released some interesting yet controversial poll results about the African-American community. In it, Pew reports that “we see a widening gulf between the values of the middle class and poor blacks,” and goes on to state that 37% of African-Americans believe “blacks can no longer be thought of as a single race.”
This was enough to get Henry Louis Gates, who heads Harvard’s African American Studies program, to put out a widely published opinion letter entitled “Forty acres and a gap in wealth.” He decries the survey findings as a loss for the black community and a threat to its shared history as embodied by civil rights giants such as Frederick Douglass and Martin Luther King Jr. He quotes the following statistic from the report: “by a ratio of 2 to 1, blacks say that the values of poor and middle-class blacks have grown more dissimilar over the past decade.” He suggests that this trend is potentially dangerous to the cohesion of the African-American community
My own research into the nature of wealth and money suggests a more nuanced view of the Pew results.
In a recent issue of New York magazine, dubbed “The Money Issue,” one of the most popular stories is titled The Catastrophist View, in which Peter Schiff, a brokerage president from Darien, Connecticut (and no relation to me), describes five threats to the U.S. economy that could send it into a “free fall.” One of those threats enumerated by Schiff, who goes by the nickname “Dr. Doom” on CNBC: “Consumers Run Out of Steam (and Take the Economy Down With Them).”
The article’s author, Duff MacDonald, writes, “70% of the [U.S. economy’s] gross domestic product is accounted for by consumer spending.” What if, he posits, consumer spending is slowed down by rising interest rates and a troubled economy? He cites a recent study which points out that six in ten households have enough savings to last them three months if they were out of a job. A more nuanced explanation would take the air out of the coming catastrophe.
“I’m not there, yet” says Janie Pryor when asked if she’s ready to eliminate her regular Botox treatments in an article titled, “The Latte Era Grinds Down” (Newsweek, Oct. 13, 2007). Written by Daniel Gross, the very astute observer of money and culture for venues including Slate.com and Wired, this article introduces us to affluent Americans like Pryor, an L.A.-based jewelry designer who claim that rising interest rates, falling real estate values, and higher gas prices have caused them to consider living a more frugal lifestyle.
From the latte lover who cut his daily coffee bill from $8 to $1 by buying his own espresso maker, to the couple who put their Dallas McMansion on the market because “I find myself going into rooms I haven’t been into in a couple of months,” this story paints a picture of economic hardship that would have been hard to believe a decade ago. We’ve become an affluent nation where the cutbacks from the heights of our spendthrift ways have reduced us to merely living very, very well.
While I don’t doubt there are well-to-do Americans who’ve been touched by the meltdown in housing values, it seems as though any efforts to rein in spending are more a matter of defensive lifestyle adjustments than any real experience of hardship, based on Gross’s account.
The Forbes 400 list of Richest Americans celebrated its 25th anniversary this year. When the list was first published in 1982, the bottom of the list could be yours for a mere $90 million. In the 2007 listing, it takes $1 billion to join the party. Staggering.
After you’ve perused through the pages of the magazine, you’ll feel like you’ve clinked Cristal with The Donald (net worth $3 billion) and wondered what 33-year old John Arnold (net worth $1.5 billion) has that you don’t have. Now that you’ve had your fun, join me back on terra firma as we walk through “everyday wealth.”
Wall Street is all over the Fed rate cut like a cheap suit—and why not? Cheap money means more profit. But clearly such a significant rate cut, (0.5% versus the expected 0.25%) tells us that the Fed thinks a serious economic threat looms and possibly a full-blown recession.
What a summer it’s been: the rash of housing foreclosures, the near-collapse of Countrywide—and the layoffs, Bernanke’s first tests at the Fed, the Bear Stearns fund collapse, more layoffs from Countrywide, and September 18’s rate cut.
EXTRA! EXTRA! READ ALL ABOUT IT: Your friends are making you fat.
Your friend catches a cold, you catch it. That makes sense. But is obesity catching? According to a new medical study recently published in The New England Journal of Medicine, social networks can spread more than just germs—they can spread lifestyle habits.
On Wednesday, August 1st, the Dow Jones Industrial Average shot up 150 points to 13,362. Even with the recent drops, the indexes are in record-breaking territory.
On the other hand, more than two thirds of Americans believe the U.S. economy is either in a recession now or will be in the next year, according to a new NBC/Wall Street Journal poll.
Wall Street vs. Main Street. Who’s right?
What’s Ferrari got that other car companies don’t? What is it about Ferrari that allows them to build fantastically expensive and completely impractical cars just to end up with a waiting list of buyers, some who go years waiting for their vehicles—if they come at all?
Since the 1970s, economists have been observing the dropping costs of everyday items such as clothing, electronics, and food. Lower costs for these kinds of items are usually considered the spoils of globalization due to free trade and technology innovation. For the past two decades or so, we’ve also heard more and more about the implications of all this easy access to daily necessities: overly materialistic kids, a “throw-away” culture, and epidemic health problems from too much junk food.
In his recent book, The Challenge of Affluence, Avner Offer, a professor of economic history at Oxford University, suggests that chasing affluence creates a ‘hedonic treadmill’ or ‘rat race.’ Offer explains, “If these rewards arrive faster than the disciplines of prudence can form, then self-control will decline with affluence.…New rewards are compelling, while their costs are not yet known.”
There’s a new research paper, entitled “The Small World of Investing: Board Connections and Mutual Fund Returns,” that’s creating a lot of buzz these days in the asset management business. The central finding—as the title suggests—is this: mutual find managers invest more money in companies run by people they went to school with than in other companies.
Apparently all those fraternity parties were a business write-off, and we didn’t even know it.
Experts who specialize in advising the high net worth on the purchase of artwork is nothing new. In fact, Christie’s and Sotheby’s, the distinguished auction houses, are each more than 200 years old. But over the last few decades, and more intensely over the last five years, art collecting has reached a fevered pitch. Clearly the new entrants into art collecting are not the bluebloods of yore. Instead, they are likely to come from the world of new money—hedge funds, entrepreneurs, corporate chieftains.
Like any other interest or hobby, art collecting has a learning curve. Whether your client is dabbling in photography—a common way to get started in art collecting, or moving right into the acquisition of substantial pieces by notable artists, it’s worthwhile for them to get the advice of well-connected, knowledgeable experts. Enter the “art advisor.”
Last week, I highlighted some of the results from a recent Wharton paper entitled “Bridging the Trust Divide: The Financial Advisor-Client Relationship.” That blog installment focused on the importance of trust between an advisor and client and the different kinds of trust a client seeks.
The paper also addresses the issue of fees and transparency because this is where some of the distrust between advisors and their clients originates. The paper points out that advisors experience discomfort when it comes to describing their fees. Z. John Zhang, a professor of marketing at Wharton, observes: “In all service industries, nobody really wants to talk about the prices. You want the customer to focus on the service you provide and the results that you can deliver. I think for financial advisors it’s the same.”
The Wharton School of the University of Pennsylvania recently issued a paper entitled, “Bridging the Trust Divide: The Financial Advisor-Client Relationship.”
The paper, sponsored by State Street Global Advisors, attempts to break down the elements that make up a trusting relationship between advisor and client and makes a particular point about the increasing importance of trust as the financial services industry becomes more service-oriented and less product-oriented. The paper, available at Wharton’s web site, contains empirical research that supports the paper’s conclusions.
The subject of trust is a critical one for an advisor. As the paper points out, ‘trust’ is more than just a marketing position; it’s an essential element of an advisor’s value proposition in the wealth management market.
In previous blog installments I’ve noted how the financial services industry, particularly the investment advisor, is capitalizing on the worldwide trend towards mass affluence. I also find it useful to keep an eye on other kinds of businesses that have come to the same conclusion as advisors have worldwide; specifically, that we are in the midst of a “wealth boom.” A profound experiment in this arena seems to have escaped my attention until recently.
Plum TV, which has been broadcasting in some markets since 2004, is a new television network available only in tony resort areas such as Aspen, the Hamptons, and Nantucket. Why is this important? Two reasons.
First, conventional wisdom has it that mass media, such as television, is not the appropriate vehicle to target affluence. After all, what self-respecting high-net-worth individual is going to take any kind of advice—lifestyle, financial or otherwise—from the boob tube? If there’s ever been a medium that was considered “high-end,” it is the magazine industry (titles such as Town and Country, Departures, Fortune, and Forbes are a few such examples).
But Plum TV circumvents the conventional wisdom by adding a twist: if you can’t get the affluent to watch mass media, bring mass media to the affluent by broadcasting in and about the towns and regions where they come together to party, hobnob, and let their hair down.
Floyd Norris, a business columnist for The New York Times, recently got into a friendly disagreement with Steve Leuthold of Minneapolis. Leuthold, founder of the Leuthold Group, an “independent, quantitative and contrarian institutional research firm” was describing swank nightclub life in New York, with its $1,600 bottles of champagne and an average table liquor bill of $3,500. Lamenting the modern state of the world of wealth, he found it “reprehensible.”
Norris, a thoughtful writer with a firm grasp of the ironic, suggested that the wealthy were merely spending the money they’ve earned and—as income tax rates have dropped over the years for top wage earners—kept. Therefore, an overpriced bottle of Cristal was simply a new form of self-imposed taxation, leading to a redistribution of wealth for the waiters and busboys, not to mention the nightclub impresarios who labor mightily to create a home for such profligacy.
Whether or not the private sector is better at redistributing wealth than the government, I will leave to others to comment on. But the economy that has sprung up around wealth over the past ten years has a more important role to play than just overpriced booze.
Parental income of college freshmen in 2005 was 60% above the national average, according to a study by UCLA's Cooperative Institutional Research Program released on April 2, 2007. The longitudinal study has surveyed incoming college freshmen since 1966. In 1975, the income of families of college freshmen was 46% above the national average.
Some are concerned that this is further evidence of the growing gap between the "haves" and the "have-nots" in America. To be sure, recent evidence points to the fact that the children of college-educated parents are more likely to go to college than the children of non-college-educated parents. Further, there's overwhelming evidence that having a college education leads to higher incomes. This is a predictable cycle and probably the intended outcome of higher education to begin with—more education leads to higher incomes and better educated parents both prioritize education and are able to provide the funds to support that priority for their children.
The best colleges in the nation could easily fill their classes with these better educated, more affluent high school students across America and there'd still be plenty of superstar students left over. However, education policy makers continue to push for economic diversity on campus, leading to even tighter standards for top students from top school districts.
I came across a statistic in an old press release from August 2002 (word of caution: the Internet never forgets) from the Consumer Federation of America (www.consumerfed.org) which noted that more than 5 billion solicitations for new credit cards were sent to Americans in a 12-month period spanning 2001 to 2002. That’s more than 50 solicitations per household.
With all of that brain power, money and creativity being leveraged just to get people to say “yes” to a new credit card, I did a little digging to find out what kinds of offers are being made to affluent Americans these days. Here are a few that caught my eye.
I recently read about a subsidized housing development in Santa Barbara, California, that, like most housing developments, comes with a maximum income limitation for residents. In this case, to be considered eligible you must have an income that is less than 2.7 times the median income of a Santa Barbara household. That comes to $177,660 for a family of four. The target range of incomes is between $130,000 and $145,000.
While six-figure income families are not what one thinks of when one imagines publicly subsidized housing, the geography of Santa Barbara is part of the story. With the Santa Ynez mountains to the east and the Pacific Ocean to the west, there’s a limited amount of real estate available.
The other culprit is the rising affluence of California’s coastal towns. In an article in The New York Times on March 18, the Santa Barbara housing authority executive director was quoted as saying that “Santa Barbara is getting Gucci-fied. If we don’t do something, we’ll lose our middle class.” With an average home price of $1.2 million, even a well-employed professional would have a hard time competing in the housing market.
The category “middle class” is a moving target.
Demographers and journalists point out that, years ago, some folks believed wealth and leisure were connected in that the well-off would work less than 40 hours a week while the less well-off would pick up all the slack. Instead, it appears the opposite is happening. This finding is echoed in the original research I did for my forthcoming book, The Middle-Class Millionaire. We surveyed more than 3,000 people who had an annual household income between $50,000 and $80,000 and more than 500 people who had a net worth of between $1 million and $10 million. According to our survey, those with net worths that were north of $1 million worked 42% more hours than our middle-class sample.
On the flip side, there are more ways for your clients to spend their wealth in order to live both better and longer.
The premiere (May 2007) issue of Portfolio magazine, the $125 million business journal from the people who bring you The New Yorker and GQ magazines, opens with a story about the modern derivatives market, or as the magazine calls it, the “$300 trillion time bomb.”
Derivatives—financial contracts whose value is determined by, or derived from, an underlying asset—have indeed become a huge market on Wall Street, responsible for significant profits globally. While this article raises some valuable concerns about the unknown implications of these instruments, the derivative market has only been around for about 25 years, substantially less time than hedge funds, and there’s much that remains to be done with this exciting new tool.
Derivatives are overwhelmingly used by institutions and large businesses that deal with assets in the hundreds of millions or billions of dollars. But I’ve been hearing some stories about derivatives being used to help individual high-net-worth clients directly. I thought I’d share one with you…
I’ll be talking about what it takes to become your client’s most valued financial counselor by becoming his “problem-solver” over the next several months. In the meantime, here are a few non-traditional requests made of problem-solvers recently:
• “A client asked me to assist in the appraisal of their pop-art collection”
• “A client asked me to help them navigate the private school admissions process for their children”
• “I evaluated the financial benefits of working with a concierge healthcare specialist”
• “I reviewed fractional jet ownership programs”
For the most part, these advisors approach problem-solving the same way:
Tons of ink have been spilled prosecuting the "me" generation over the years, but the new wealthy show a tendency toward power philanthropy that's a far cry from traditional, less rigorous "checkbook charity" and resembles more the Rockefeller school of giving It's not just Bill and Melinda Gates who add shape to their philanthropic efforts with bold goals and thorough due diligence. Increasingly, the emerging affluent middle class are going beyond bequeathments in their wills, activating giving strategies much earlier and looking for areas that both stimulate their interests and capitalize on their unique talents. This business-savvy approach allows them to participate in their gift-giving and track the results of their efforts.
Continued growth is expected. According to a report from The Foundation Center, independent and family foundations—which account for nearly nine out of ten foundations—raised their giving by 10.3% in 2006, the first double-digit increase since 2001. The Center attributes this increase both to rising wealth and the increasing rate of foundation establishment in America.
Welcome to my new blog, the companion for my column in Investment Advisor also called The Affluentialist. Webster’s New Millennium Dictionary of English tells us “affluential” is an adjective combining the words “affluent” and “influential” and simply means ‘rich and powerful.’
I’ll be updating this blog frequently to help you keep tabs on items that are of critical value to your business—including actionable research, developing trends, and outside expert analysis—in particular, as it pertains to the high-net-worth client.
The numbers are clear. By the year 2010, 10% of America’s households –more than 11 million families—will have a net worth of $1 million or more, investable assets of more than $500,000, and increasingly complex financial lives. Not since the baby boom generation transformed retirement planning a decade ago have we seen a “pig in a python” like today’s emerging affluent middle-class. We’re in for a “wealth boom.” They are rich (the top 10% of American wealth accounts for more than $30 trillion in assets) and they are powerful—but not the conventional stereotype of power as a mysterious, shadowy force. Their power comes from their numbers. Eleven million families have enormous influence on everything from commerce to society to government and politics to the environment.
