Scott Fitzgerald once wrote that the very rich "are different than you and me." Our research at Spectrem Group has found just the opposite. Wealthy Americans are, for the most part, a hard-working, down-to-earth and self-effacing group who worry about the financial well-being of their children and grandchildren.
Surprisingly, few multimillionaires see themselves as "very wealthy." Much like the rest of us, they fret about the economy, the federal deficit, taxes and health care.
The recession taught them many sobering lessons, but the biggest, they say, is that their home is not a stable investment. Among many striking details in our latest surveys, we learned that they are investing in mutual funds and exchange-traded funds in part to avoid the cost of financial advice, and showing more interest in alternative energy stocks and commercial real estate.
Every month, Spectrem surveys investors with a net worth, not including a primary residence, of $100,000 to $1 million (the Mass Affluent), $1 million to $5 million (Millionaire), $5 million to $25 million (Ultra High Net Worth) and our top group, $25 million-plus. With this data, we analyze asset allocations, and the attitudes and perceptions behind the investment decisions that are made.
Our one-on-one interviews and small focus groups allow us to attach faces to the numbers, and give us a fully fleshed portrait of the nation's rich. Many are self-made millionaires with confidence, smarts and a high degree of pragmatism.
Most described themselves and their spouses as coming from moderate or poor backgrounds. The majority attributed their financial success to hard work, a solid education, smart investing moves, taking risks and plain old luck.
A STATE OF MIND
Multi-millionaires don't always feel rich. Only 10% of the $5 million to $25 million group described themselves as "very wealthy" in a recent survey, and 28% considered themselves of "moderate wealth."
Yet by any measure their wealth and income are exceptional. On average, their salary and income from investments and retirement plans comes to $448,000 before taxes.
Only 2.1% of American households earn an annual income of $250,000 or more. The average annual income across America was $32,544 before taxes in 2009, the latest figure available.
The fact that our respondents do not see themselves as exceptional suggests that wealth is as much a state of mind as a matter of dollars. Nearly three-quarters of the Ultra High Net Worth group worry about the finances of their kids and grandkids and some 40% are concerned about when they will be able to retire and if they'll have enough money. The rich and not so rich also share remarkably similar levels of concern over how they would cope financially with a catastrophic illness or injury in their families.
Most investors do not believe the recession that ended last year is over, our research shows. Like other Americans, Millionaires and the Mass Affluent have taken steps to reduce their debt and both groups say it's more important to protect principal than grow assets.
Members of both groups tend to say they will have to delay retirement as a result of the recent recession. Those with less than $1 million in investable assets worry about inflation, while wealthier investors worry more about national issues. The federal deficit is their single greatest concern.
After a string of gains and a push into bullish territory for the first time since October 2007, the Spectrem Millionaire Investor Confidence Index dropped last month. It was the second consecutive decline and the lowest level in seven months. Investors have expressed worry over unemployment, the strength of the economy and the political climate.
The Conference Board measured a similar decline in the Consumer Confidence Index, which dropped to 63.4 in March from 72 in February. Consumers were noticeably more pessimistic about the job market, business conditions and risks of inflation. (The measure for April ticked higher to 65.4.)
RECOVERING FROM RECESSION
The number of Millionaires is beginning to return to pre-recession levels. The Ultra High Net Worth group grew to more than 1.06 million Americans in 2010, up from 980,000 in 2009 but still below its peak of 1.16 million in 2007, according to the Spectrem 2011 Affluent Market Insights report. The Mass Affluent reached 13.5 million, rising from 12.7 million in 2009, but still down significantly from 15.7 million in 2007.
Education makes a big difference. The Ultra High Net Worth group is highly educated, bearing out U.S. Census data that show a very strong correlation between education and annual income.
Americans with bachelor degrees - 29.6% of the population - earn an average of $58,613 a year, while professionals with advanced degrees, such as doctors and lawyers, earn $125,019 a year, on average. Slightly more than 10% of all Americans have an advanced degree, compared with two-thirds of those with $5 million to $25 million.
MOVING BACK INTO STOCKS
Despite their pessimism, Millionaires and the Mass Affluent are shifting away from ultra-conservative investments, such as certificates of deposit with historically low interest rates, and they both report a slow move back into the stock market. They may not feel more optimistic than they did in 2009, but they realize that cash is not their only investment option.
All of the groups favored technology stocks at the beginning of this year, but are expressing a growing interest in energy stocks. In March, more than half of our survey respondents told us they were "interested" or "very interested" in the stocks of energy companies.
Market analysts anticipate that volatile commodity markets - oil in particular - will stimulate demand for alternate energy solutions. The wealthy may be joining the growing number of investors who believe that buying "green" stocks will be good for their portfolios as well as the environment.
A growing percentage of wealthy households, 40%, are investing in ETFs, up from 25% in 2009 and 15% in 2005. Gold, silver and copper ETFs are among the most popular, a surge that partly reflects lack of confidence in the U.S. economy.
SAVVY AND SEEKING DEALS
The wealthy value professional financial advice and are willing to pay for it. They maintain long-standing relationships with their advisors, but they are more likely than ever to use mutual funds, as well as banks and discount online brokers, in part to cut costs. Like other investors, they view advisor fees as expensive.
For the most part, the wealthy are sophisticated investors who like to be actively involved in managing their finances. They are particularly sensitive to the risk and the tax implications of their investments, and are more likely than others to invest in tax-sheltered accounts and participate in 529 college savings plans, 401(k) plans and IRAs. Nearly all have an IRA.
Investors with at least $1 million are not fleeing the municipal bond market, despite popular fear of significant defaults. This reflects both their sophistication and access to professional advice, and the fact that they have the most to gain from the substantial tax advantages of munis. Wealthier investors are also much more likely to hold individual bonds with guaranteed principal than shares in muni bond funds, where the principal is at risk.
The wealthy are big savers and are keeping more cash. As a group, they are very media savvy and aggressively use Facebook, LinkedIn, smart phones and computer tablets to manage their finances.
Successful entrepreneurs and executives have realized that smart phones and tablets - with their innovative software applications - are integral to their success. They are using mobile apps to create business networks, recruit talent, communicate with clients, and research and manage their investments.
These new technologies have created a huge and growing appetite for information. Millionaire households use financial podcasts and webinars, and most use email to correspond with their financial advisors.
More than 90% go online to research financial issues and products, and pay bills. Nearly all say they go online to access their personal account information.
Investors across all wealth levels feel accounting firms are the most trustworthy providers of financial services. However, more than 90% rank Fidelity and Vanguard as by far the most trustworthy financial service providers.
THE $25 MILLION-PLUS GROUP
As the commercial real estate market begins to recover from a three-year decline - which saw prices drop more than 40% from peaks in 2007 - our wealthiest group has begun to consider increasing their real estate holdings. The current market offers bargain prices, potential income and a hedge against inflation.
The Internal Revenue Service has stepped up its enforcement efforts and reports that the wealthiest taxpayers are the most likely to be audited. The IRS audited 18.4% of the returns filed in 2009 by taxpayers in the highest tier - those with an adjusted gross income of $10 million or more. Overall, the agency audited just 1.1% of the 141 million returns filed that year.
Charitable giving figures into the financial plans of virtually all wealthy Americans. Again, running counter to any popular stereotypes, our research shows that the richest spend more on charitable gifts than they do on luxury items for themselves.
Their biggest luxury expenditure is on travel, but most of their trips are centered around spending time with their children and grandchildren. Indeed, charity begins in the homes of the wealthy and, in many ways, their homes are much like yours or mine.
George H. Walper Jr. is president of Spectrem Group, a consulting firm in Lake Forest, Ill., that produces the website MillionaireCorner.com.