Smart Money

By staff January 1, 2006

Want to know who the smart money is and where it's going right now?

We did, so we asked one of the country's leading experts on the ultra-wealthy: Dwight Cass, editor-in-chief of Worth magazine, which is owned by our parent company, CurtCo Media. While his average reader has a net worth of around $5 million, Cass says his magazine is actually written for those with a net worth of $50 million or more, a level of wealth that brings unique challenges as well as rewards and requires sophisticated financial services. Only about 770,000 American households come up to that $5 million mark, and only 150,000 or so occupy the rarefied ranks over $50 million, says Cass; but those numbers have been growing by around 7 percent a year since 2002. The most rapid rise in ultra-affluence is in Asia, with tremendous wealth being created in Singapore and Hong Kong, as well as in what investors call the "BRIC" nations-Brazil, Russia, India and China.

This glittering sliver of the world's population has created an explosion in luxury goods and services, a market many believe-rightly or wrongly, notes Cass-to be recession-proof. It's also prompted all sorts of studies aimed at examining the spending, investments and psyches of the ultra-rich, including one Worth recently conducted with Connecticut's Harrison Group. Based on two-hour face-to-face interviews with 500 Americans who each had at least $5 million in net worth, the Worth-Harrison Taylor Study on the Status of Wealth in America paints a revealing picture of this privileged group.

The vast majority are white, married, college-educated males who created their fortunes through building a business rather than working for others or inheriting wealth. (Best career tip? Quit your nine-to-five and start your own shop.) They had an average annual income of $1.9 million and spent about $850,000 of that. (Interestingly, it's not the nouveau riche who are the biggest spenders; the study found the newly wealthy are more conservative in both their spending and investing than those who have enjoyed wealth for five years or more. As the saying goes, a man can get used to anything, even being hanged.)

And though many believe the wealthy are primarily conservative Republicans, the study found otherwise-55 percent were Republicans, 23 percent Democrats and the rest independent. Nor do they have a "monolithic view" of taxes, says Cass. Thirty-three percent felt they should pay more taxes. Like Bill Gates' father, who has campaigned against eliminating the estate tax, says Cass, a significant percentage believe they should give back to society since "they made their fortunes with the support of society and social institutions."

Between 2002 and 2004, charitable giving by households with a net worth of at least $5 million plummeted by 70 percent, but the study should give hope to not-for-profits. Ninety-six percent of those studied agreed that wealth imposed an obligation to give to the less fortunate, and Cass points out another reason why ultra-affluent families support philanthropy: Many parents worry about how their great wealth will affect their children. In fact, almost a quarter of the very wealthy say they're not even going to let their children know how rich they really are. For children who may never need to develop a work ethic, says Cass, training in philanthropy can supply another ethic. "It helps to transfer values to your kids, something that can give meaning to their lives," he explains.

But if giving remains important to the wealthy, the way they give is changing, says Cass. Those who made their fortunes during the tech boom in the '90s often approach philanthropy the same way they did their businesses, demanding hands-on involvement, accountability, measurable outcomes and even an exit strategy. Many, Cass says, come to realize that you can't measure outcomes for many charitable endeavors-think of a soup kitchen or hospice services-nor can you turn not-for-profits into profitable operations and then walk away. "They're losing propositions from a business standpoint," he says. "That's why we need philanthropy."

Still, they and many other philanthropists today are what Cass calls "venture philanthropists," who aren't satisfied to write a check and send it off. Instead, they want involvement and control in the causes they support.

The more wealth people have, the more help they need managing it, and financial service firms are following the money in record numbers. Such companies need to understand that corporate scandals and the languishing stock market have made the wealthy wary of their advisors, sparking huge growth in independent firms and requiring new approaches at every level.

And even with all that help, adds Cass, the wealthy are struggling to find good investments right now. With the re-emergence of inflation, the flattening of the yield curve, the stagnation of the equity markets and the lackluster fixed-income world, only private equities and the best hedge funds hold out much hope, he says. "There's a mad rush to get into the top performers, but they can't manage that much money," he says. And while many believe investment opportunities abound in the BRIC countries, finding advisors with expertise there is enormously difficult. As a result, the top question for many wealthy clients is how to find and get access to the best manager.

The country's wealthiest investors are worried, agrees George Walper, president of Chicago's Spectrem Group, which surveys investor attitudes for financial institutions. While the wealthiest tend to be the most optimistic, this fall "their level of optimism dropped significantly," he says. "They're very concerned about the U.S. economy, the war and other political issues." Because this group wields so much influence-including over candidates and campaigns-that could signal a coming change in the country's direction.

Those who study the wealthy know that great wealth also isolates. The ultra-wealthy often socialize only with each other, and it's easy to see why. Your former friends may be envious or uncomfortable around you; people ask you for money and expect you to pick up every tab; and your worries about security, managing your vacation homes and how to invest your assets won't get much sympathy from those who are struggling just to get by.

But they can deal with it. The Worth-Harrison study found that 83 percent of wealthy people want to keep getting wealthier, and the longer they have money, the more comfortable they get with it.

And are they happier than other people?

Walper, who has built his career around studying the wealthy, considers the question. "They're not any more happy or less happy than anyone else," he decides. "They just have different issues they worry about."

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