The Really Rich Fared Better Than The Merely Rich In Market Downturn
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The technology bust of the late 90s hurt those on the low end of the high-net-worth spectrum more than it did the super affluent in the United States, according to a new report from market analyst Datamonitor, based in London.
Many of these so-called "mass affluent investors," i.e., individuals holding between $50,000 and $300,000 in liquid assets, were stripped of their wealth virtually overnight as the market plunged, Datamonitor says in its new study, "U.S. High Net Worths 2003."
The wealthiest investorsthose with liquid assets of $1.5 million and up–fared better than most because they typically have a more diversified portfolio, which mitigated the effects of the bust, Datamonitor says.
The report predicts a more favorable investment climate in the years immediately ahead. This, along with better educated investors, will boost the number of wealthy individuals in the U.S. but not to the levels seen in the late 1990s, Datamonitor says.
For financial planners and advisors, a return of growth to the affluent market would be great news. But experts warn that high-net-worth investors will be wary following the recent market volatility and corporate accounting scandals, such as Enron. Fresh allegations of fraud against mutual fund firms arent helping either.
"Investors who thought that in the equity boom everyone was an investment expert have had their fingers burned in recent years, and they will have learned a valuable lesson," says Datamonitor analyst Alan Shields, an author of the report. "Going forward, these investors will be cautious and looking out for products that can offer some level of capital guarantee.
"The challenge for wealth managers will be to regain their trust by working with clients to grow their assets. Wealth managers cannot rely on another equity bull market to fuel the growth of client portfolios," Shields says.
As the stock market rebounds, advisors fighting for a piece of the wealth-management pie need to be sensitive to opportunities for success, Shields says.
"I think the first thing is to build trust especially in the U.S., hit by corporate finance scandals such as Enron as well as the market failure," he says.
For instance, in view of the recent scandal over mutual funds favoring a few select investors, investment managers need to show that individual investors are treated the same as large institutions.
For starters, banks and wealth managers can put their own funds into the same investments they are recommending to wealthy clients, says Shields.
"Its one thing to say, Invest here, and another to say, Look, weve invested here as well," he says.
Innovation will also be key to earning trust, he adds.
"You cant keep doing what you did for the past 5 years," Shields says. "For instance, many clients now want capital-protected products, such as property warrants where you can hedge against property risk. Or if clients have a lot of property tied up in their business, maybe you can invent ways for them to borrow money against those assets to free up capital."
The bust only served to prove the value of advising clients to follow an asset allocation model, says Bob Musar, a financial planner, with the Uniontown, Pa., branch of the Greater Pittsburgh Agency, a unit of Prudential Financial.
"Asset allocation kind of fell out of favor during the technology wave, but clients that followed that model came through well," Musar says.
