Now Even Millionaires Can See the Benefits of Budgeting
SOMEONE with $100 million has nothing to fear, not even fear itself.
“People who would get a new Mercedes S550 every couple of years aren’t doing it now,” said G. Moffett Cochran, chief executive of Silvercrest Asset Management.
Wealth Matters
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Paul Sullivan’s Columns »But not long ago, a client with such assets called and asked Bruce Bickel, her wealth adviser at PNC Wealth Management, to put her on a budget.
“She said we’ve never done this before, and we think we should,” said Mr. Bickel, managing director of private foundation management services at PNC. “It’s all relative. Their loss has put them in a fear response.”
That mindset is a direct result of the financial panic that turned one year old this week. At this time last year, Richard Fuld was center stage in the financial crisis; Ken Lewis, chief executive of Bank of America, was being hailed as Merrill Lynch’s savior; and Bernard L. Madoff was little known beyond the financial world.
None of that is true today. And even though a year has passed, wealthy investors remain cautious.
The Boston Consulting Group predicted this week that worldwide wealth would not return to 2007 precrisis levels until 2013. It also said it found that the number of millionaires was down 18 percent and that, across the board, clients of wealth management firms had lost trust in their advisers.
“There is a shattered confidence we haven’t seen in a long time,” said Bruce Holley, senior partner at the firm. “The wealth management business is a very emotional business, and people can react in kind to that.”
This explains how someone with more than $100 million in assets can ask her adviser to put her on a budget. As far-fetched as it may sound to someone struggling to make a mortgage payment, such a request reflects the changes in attitudes about wealth in the last year.
SHOW ME THE MONEY Watching where your money goes is more than just having a budget. “One of my families said, ‘If you’re worried about spending, then you’re not wealthy,’ ” Mr. Bickel said. “But across the board, there is greater discernment with use of discretionary income.”
That discernment has taken many forms. One is charity. Many of the two dozen private foundations Mr. Bickel advises have become more focused in their giving. In one case, the family used to give to various cancer-related charities, but it now concentrates on cancer research. The family has not reduced what it gives, just focused it on a particular area to have greater effect.
Still, any budgeting is bound to encompass personal expenses, even for those with plenty.
“People who would get a new Mercedes S550 every couple of years aren’t doing it now,” said G. Moffett Cochran, chief executive of Silvercrest Asset Management, which has an average account size of $30 million. “The next car may not be an S550; it may be an Acura. There’s an awareness of conspicuous consumption.”
This feeling is gaining ground. Mr. Bickel said he has been helping parents talk to children about cutting back and doing so without feeling guilty. “They say, ‘My teenager isn’t driving a BMW; she has to drive a Ford Focus,’ ” he said. “I tell them not to worry about it. The need is the car. The desire is the BMW.”
In both cases, the car buyers could probably buy any car they wanted. But they are thinking more about what else they could do with that money. This caution, too, is reflected in their investing practices.
EASY DOES IT Even though stock markets have rebounded from their lows this year, wealthy investors have not rushed back in.
Nancy Rooney, head of the Northeast investment business for J.P. Morgan private wealth management, which serves clients with $1 million to $25 million, said she has seen two types of investors become cautious in their investing.
The first have new money and had not experienced serious market swings before. They had been focused on their quarterly gains and largely ignored the risks. Having lost a lot more money than they thought possible, they are struggling with the shock of it.
Or, as Mr. Cochran put it, “Many people thought they were gunslingers.” Now, he said, “They’re not gunslingers any more.” Mr. Holley described the sentiment as a return to “meat and potatoes” investing.
Now, that group is focused more on the risk of an investment than its possible return. One result is they are poring through all the disclosures before investing, and they are not as worried about missing out if they are pressured to invest too quickly.
The second group is older and held wealth longer. They exhibited almost a knee-jerk reaction to the crisis and put a lot of money into cash early on. They continued to stand on the sidelines through the initial rebound. Only now are they looking to invest in safe assets, like prerefunded bonds secured by United States government obligations.
“We are very gradually working with them,” Ms. Rooney said. “For many of them, it was a loss of confidence in themselves as well as in the markets.”
Mr. Cochran said he believed many clients thought the world was coming to an end last September. That it did not end has not consoled them. They are still hesitant with new investments.
One reason is that many do not want to tie up their assets and then not have access when and if they need money. No one wants to have to sell a good asset at a bad price to cover living costs. The problem, though, is that cash or money market funds will not keep pace with inflation. So they will have to dip into the principal of their portfolio.
One longtime real estate investor Ms. Rooney spoke to said he understood the ebb and flow of investment returns but was still spooked by what happened last fall. “The inability to access all of his funds immediately sent a panic though him that he hadn’t focused on before,” she said.
This means, for now at least, that even savvy investors are willing to pass on investing with a top manager if they feel their money would be locked up too long.
“Even when the markets rebound, we don’t expect people to get in with the same speed as before to the high-yielding assets,” said Monish Kumar, global leader of asset and wealth management at Boston Consulting.
THE FUTURE Caution, like thrift, can be detrimental to an economy in crisis. If wealthy investors steer clear of stocks for the medium term, the trading rally of the last few months could slow. If they are afraid to lock up their capital for the longer term, private equity partnerships and hedge funds could suffer. And if wealthier people eschew the heavy debt load they had recently embraced, their savings may increase but the banks that had eagerly lent to them will feel the effect. And this will then affect less-affluent investors.
Yet these are all ifs born of a mild recovery. Last year at this time, few advisers would have predicted that the economy would have come back this far this soon.
“Many of our clients are very happy to be sitting on bond portfolios and cash reserves,” Mr. Cochran said. “What I can’t answer is whether that money is permanently on the sidelines.”
Regardless, a budget isn’t a bad idea.
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