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Affluent Americans lost in an alternative world

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There are more millionaires living in America than ever before, and with many putting off retirement wealth preservation is an important issue. Marc Smith reports on the investment habits of the super-rich and finds that all is not as it seems …

Marc Smith is deputy editor of Families in Business.

Stock market falls, a weakening dollar and worldwide geopolitical uncertainty – the American super-rich are proving resistant to everything the world can throw at them. While their confidence may be suffering an understandable blip given the recent travails, a new report by US consulting firm Spectrem Group shows just how well the wealthy are getting on.

The report's major finding is that the number of ultra high net worth (UHNW) households ­– defined as those with a net worth of $5 million not including their primary residence – has exceeded one million for the first time. In 2006 the number reached 1.14 million, up from 930,000 in 2005 and just 250,000 a decade ago.

Given the US's ageing population, it is no surprise to learn that the average age of an UHNW individual has increased to 65 or that 37% are senior corporate executives or business owners. In addition, 56% of UHNWs are either semi-retired or retired.

A further survey by Northern Trust has found that while just under half (48%) of all millionaires are retired, nearly a third (29%) have returned to work in some capacity. Incredibly, one in six millionaires over 70 remain in the nation's workforce.

Keeping your fortune
Naturally, when you have made your fortune, your attention turns to ensuring you don't lose it. The Spectrem report reveals that the percentage of UHNWs wanting to build wealth, as opposed to preserving it, has fallen from 68% to 59% in the past three years.

The UHNW investor is becoming more risk averse and many have admitted that while they have a good understanding of traditional investment products, such as certificate of deposits (84% said they had an understanding) and mutual funds (78%), they have much less understanding of the more complicated vehicles such as hedge funds (30%) and
structured products (50%).

Given a choice of alternative investments, affluent investors – defined as those with more than $500,000 in investable assets – prefer private equity and venture capital (most likely because they are familiar business tools to successful business people), although there is no clear favourite given that, as we have seen above, they are generally not as well understood.

"While hedge funds have been in the news, affluent investors still don't feel they understand these alternative investments," said Catherine S McBreen, managing director of Spectrem. "This gap in understanding corresponds with a distinct lack of interest in hedge funds and other alternative investments such as structured products and private placements.

"Financial services providers offering these products need to be proactive in educating affluent investors about their risks and rewards. Given their lack of interest, it seems unlikely these investors will step forward seeking more information."

Advisor requirements
When choosing an advisor, the affluent investor requires them to fully understand their financial goals and provide real solutions in the context of family needs. Referrals, a similar background and understanding an investor's emotional needs were not essential.

Finally, when it comes to spending, UHNW households are not ostentatious. Most spend less than $10,000 a year on items such as clothing and jewellery, while travel and home improvements are the areas where most are likely to spend their cash.

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