Debt Free

If you want to be an affluent investor, you have to think like one. Find someone or a group who you want to aspire to, and emulate their behavior. In this case you want to emulate the behavior of the affluent investor in the hopes of becoming such an investor yourself. Sounds good, right? Well, read on.

Many affluent investors, those with investable assets over $500,000, are not as astute in the ways of finance as one would expect. According to research published in 2005 by the Spectrem Group, a research firm specializing in the affluent consumer niche, many investors in the upper reaches are oblivious to certain finer points of investing and personal finance you'd think they'd be well versed in. For example, an astonishing 70% of those investors studied admitted to having little or no knowledge of tax shelters! One explanation may be that they can afford to hire experts to handle such things for them, but you'd expect them to have at least rudimentary knowledge of tax related matters.

Over 60% of investors in the study were not versed in 529 plans or annuities either. Less than half felt they had much knowledge of cash value insurance or, unbelievably, IRAs. You'd expect at least IRAs would be fairly familiar to investors with this kind of asset base. It seems that many of these investors could be even more affluent if they had a better understanding on how to retain more of their earnings and give less to the IRS and state DORs.

Who do the investors turn to for primary financial advice? Most of those surveyed (31% in 2006, up from 24% in 2004) used a full service broker, with only slightly less (28%) using their accountant. Surprising that they aren't more aware of tax shelters, given the propensity of this investor class to use accountants for primary financial advice. Among these investors, there is a trend toward full service brokerages and away from wire service providers. Only 17% in 2004 used financial planners as their primary financial advisor, and that figure dropped even lower last year, down to 13%.

What's strange that when ultra high net worth investors (over $5 million net assets) were surveyed over the last few years, they report swinging in the other direction than the affluent investors. The trend among this group is away from full service brokers and toward private financial advisors. In 2001, 41% of ultra high net worth investors used full service brokerage houses, but that number has now dropped to 30%. At the same time, the trend toward independent financial advisors among these investors is growing. Of those who used financial advisors, 65% avoided those affiliated with a major financial institution, citing greater objectivity.

When investing, where do they put their money? Another study released in 2006 by the same organization found that affluent investors tend to avoid risky investments like a date with bad breath, preferring to concentrate on investments with a more or less guaranteed return. They have 37% of their assets in real estate, with an average 23% of that being in their primary residence. 22% of their assets are investable, such as equities and bonds. Millionaire investors, those investors with over a million dollars in investable assets tend to have a much lower percentage of their total assets in real estate (13%) than the affluent investor. That makes sense when you look at the percentage that the affluent investor has tied up in their primary residence. Presumably, the investor with much larger holdings would have a smaller percentage in their primary residence.

The ultra high net worth investor actually has a lower risk tolerance than those with substantial, but fewer assets, with 76% thinking themselves moderate or conservative when it comes to investment behavior. They tend to avoid venture capital and hedge fund investments, interesting, when you consider an investor must have substantial assets to be eligible for such instruments. Many are now keeping more of their net worth in cash or value oriented equities. One note is that these investors tend to be older, and they may have been substantially more aggressive earlier in their investing careers. Recently average(?) investors of the ultra high net worth class have 45% of their assets in domestic equities, 15% in bonds and 13% in cash. Only 1% were in commodities or hedge funds and 5% in private equities. Only 7% hold investment real estate, apart from the assets they have in their residence(s).