While ultra-high net worth individuals are often considered the Holy Grail for financial advisors, they have their work cut out for them when it comes to managing this type of wealth.

Although ultra-wealthy individuals are anxious about depleting their assets, their expectations and actions when it comes to preserving and growing their wealth are not always aligned, according to a survey, “Algorithms of Wealth,” conducted by SEI Investments Company (SEIC) and Scorpio Partnership. The survey queried 275 ultra-wealthy individuals. On average, total financial assets of the respondents was $18 million each. (For related reading, see: Ultra-Wealthy and Advisors: Why Relationships Matter.)

What They Expect and Fear

Wealthy people expect, on average, that their investments will grow 15.8% in the coming year. The survey points out that this clearly indicates a level of return generally associated with taking on more concentration and market risk. At the same time, however, 59% said their biggest anxiety is running out of money.

“It is not surprising that investors want to have their cake and eat it, too," said Jeff Ladouceur, director of SEI Private Wealth Management. "However, it’s dangerous to become overly focused on double-digit returns at the expense of preservation goals like future lifestyle. It remains crucial that families create well-defined and measurable goals supported by portfolios specifically designed for preservation and growth objectives.” 

Respondents under the age of 40 expect about 24% portfolio growth in the coming year and 44% cite running out of money as a top concern. Those in their 40s and 50s expect less growth at 14.2% and are much more likely to cite running out of money as their top financial concern (65%). (For related reading, see: Use Private Equity Strategy to Invest.)

Who Wants to Spend

Even though ultra-high net worth individuals are worried about depleting their assets, many anticipate a significant increase in spending in the coming years. More than one-third anticipate their spending to grow by up to 25% in the next five years. The younger ultra-wealthy are the most likely of all age groups to expect the greatest increases in spending. Twenty-two percent expect an increase of 25% to 49% and 7% of them expect an increase of at least 50%. In comparison, most (82%) of those 40 to 59 years old expect increases of less than 25%.

“Again, the results are incongruous,” Ladouceur said. “The same respondents that expect a high rate of return are the same respondents that fear their spending will outpace their returns. A lack of alignment between portfolio goals and capital uses is clearly evident.”

The anticipated increase in spending is not unique to the ultra-high net worth. In a survey of the broader population, SEI and Scorpio found that 31% of investors across the board forecast that they will increase their spending by up to 25% in the next five years. Like their ultra-wealthy counterparts, younger respondents were more likely to expect higher increases than older respondents.

DIY Approach

The ultra-wealthy spend much more time thinking about financial goals than most people. The majority (80%) of survey participants from the broader U.S. population spend less than nine hours a week thinking about their financial goals compared to the average ultra-high net worth individual who spends 15 hours a week doing the same. The young and wealthy spend even more time thinking about financial goals — 25 hours. The additional hours are apparently not time well spent; the study maintains that the ultra-high net worth remain “benchmark focused” rather than “outcomes focused.” (For related reading, see: Should Advisors Only Target the Ultra-Wealthy?)

More than one-third of ultra-high net worth individuals consider themselves self-directed investors. An additional 23% only use a financial advisor for guidance on more complex investments. The study points out that these individuals lose the benefit of a boardroom approach to wealth management. This approach features a single trusted financial advisor who has a deep understanding of the client as well as the financial expertise to meet their objectives and goals.

“We see a noteworthy disconnect,” Ladouceur said. “The wealthier you become, the greater the need for a ‘boardroom approach’ to wealth management. And yet, the survey shows that investors are taking the complete opposite approach. Going it alone ensures that you will spend the majority of your time tracking relative performance and not actively planning how to put your wealth to work.”

Apparently the self-directed approach to managing wealth and the time it involves is not helping the wealthy meet their financial goals and expectations. On average, such rich folks are $10.8 million away from achieving their life’s financial ambitions, the survey found.

“Nearly three-quarters say meeting a goal on time or early is among their top three measurements of success. However, without the right resources and the right team behind you, this is simply not time well spent,” Ladouceur said.

The Bottom Line

Many ultra-high net worth individuals have high expectations when it comes to investment returns and at the same fear depleting their assets. They also spend a considerable amount of time thinking about financial goals. This presents opportunity for financial advisors who can help this segment of the population take an outcome versus benchmark approach to managing their expectations and wealth. (For related reading, see: High-Net-Worth Client Tips for Financial Advisors.)

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