Millionaires and affluent investors suffered steep losses in 2008, and most, particularly Baby Boomers, are rolling their remaining assets into cash and stable-value investments for the foreseeable future.
Their confidence in calm, reassuring advisers and full-service brokers is at an all-time low after these experts failed to predict or prevent an average portfolio loss of 30% last year.
To rebuild investor confidence and attract future assets, money managers and financial advisers will need to take some major steps, such as dropping commission charges and lowering fees, according to a new report from the Spectrem Group titled "Attitudes of Affluent Investors on Surviving the Economic Crisis."
"The current financial crisis has had a dramatic impact on America's millionaires, reducing their net worth substantially and threatening their ability to maintain both lifestyles and retirement plans," said Catherine McBreen, managing director of Spectrem Group.
Most millionaires don't blame their advisers for their losses, but their satisfaction levels have dropped precipitously, she said. Less than 40% believe their adviser has performed well during this crisis, compared to a 65% approval before the economy and the markets started tanking.
"Advisers are on trial," McBreen said. "Clients don't feel their adviser was particularly helpful for mitigating their losses. A lot of investors said they were not sure their adviser provided any value."
Focus group research revealed many investors doubt whether their advisers know little more than they do about investing, Spectrem said
"These guys don't know much," one disgruntled respondent said. "Some are barely out of college. They've never seen the market go down like this. They don't know what to do."
"Mama said there'd be days like this," said Garry Bridgeman, first vice president of investments for the Private Banking and Investment Group at Merrill Lynch. "Investors have got to be adults. When you invest, you've got risk. Everyone expects the markets will always go up at a 45-degree angle, but instead, it zigs and zags."
The average millionaire lost 29% of their overall net worth in 2008, and 17% said they lost more than 40%, the report said. Their biggest losses were in equities, mutual funds, real estate and individual retirement accounts.
"Some people know exactly what they lost and could tell you the number," McBreen said.
Eighty percent of millionaires said this is the worst financial crisis they have ever experienced, the report said, while more than 49% said they are changing their short-term spending habits, and a third said they will be forced to delay their retirement.
Most high-net-worth investors don't think the market has reached its bottom, and most believe the current economic slump will last another two years. Their biggest concern is for a prolonged economic downturn and continued drops in the financial markets.
"Overall, investors are very angry with financial services agencies, with Wall Street and with our government," McBreen said.
Investors did not distinguish between firms that received bailout funds and those that didn't, she said. "In their opinion, everybody was bailed out, and they were all bad," she said.
"Investors can't easily demonstrate their anger toward the government, but they can and eventually will demonstrate that anger toward firms they believe are responsible," Spectrem. "This will lead to investors changing advisers, arguing about fees or becoming more self-directed."
McBreen said the most important feature in an adviser is trust. For 25% of millionaires, this trust has decreased dramatically. Advisers can take steps to improve trust and retain customers, such as making sure investors have access to their balances 24/7.
"If they don't have access to the information they feel they need, panic might ensue," Spectrem said. "About one-third of investors are checking their balances daily, while another third are checking balances weekly."
"The trust element has definitely been brought into question," Bridgeman said.
Full-service brokers suffered reputational damage, with 45% of millionaires viewing them in a negative light. A third of high-net-worth investors said they haven't been contacted by their adviser since September, and half of millionaires said they would consider firing an adviser who wasn't proactive or didn't return their phone calls in a timely manner.
Banks have suffered the biggest loss of reputation during the crisis, with 61% of respondents viewing them negatively, but only 33% of millionaires said they view mutual funds in a negative light.
Some mutual fund companies, such as Fidelity and Vanguard, have higher positive ratings than negative ratings, the report found. Interestingly, many investors defined the companies as their primary adviser, even though neither of these firms has full-service brokers. Fidelity and Vanguard do have strong relationships with independent advisers.
"What is unclear for fund companies is whether investors who are not happy with their 'advisers,' are referring to the fund companies or to an independent adviser who uses the fund company as a platform," the report said. "Baby Boomers have been the most impacted, especially those five to 10 years from retirement," McBreen said, adding that this group has made the biggest migration toward safer investments like cash.
While many younger millionaires under age 45 saw sizeable losses, they also expressed the greatest interest in buying stocks and mutual funds while they are cheap, she said. Younger investors were also more likely to adjust their spending habits.
"Mutual funds were not popular with people ages 45 and older," McBreen said. She said investors older than 65 won't make as big of a move to more conservative assets, as they were probably pretty conservative before.
While many millionaires said they wanted the more personalized attention and expertise often found at smaller shops, they also favored bigger, "brand-name" firms because they appear safer and more likely to receive a government bailout. Conversely, 58% of investors said their relationship with their adviser was more important than the firm they work for, and indicated they would follow their adviser to another firm.
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