Wealth Advisor: The Search for Middle Class Millionaires

As they set their sights on wealthier clients, the financial services industry and independent reps are combing the countryside for pockets of newly affluent investors whom they can appeal to and work with. There are of course plenty of solid and obvious candidates, including those who rode the bull market of the 1990s to wealth and the Baby Boomers who are in line to inherit trillions from their

As they set their sights on wealthier clients, the financial services industry and independent reps are combing the countryside for pockets of newly affluent investors whom they can appeal to and work with. There are of course plenty of solid — and obvious — candidates, including those who rode the bull market of the 1990s to wealth and the Baby Boomers who are in line to inherit trillions from their parents over the next decade or so. But few potential clients have attracted as much interest as those comparatively low-key investors who have accumulated their wealth gradually and without fanfare, a group that we call the Middle Class Millionaires.

These under-the-radar millionaires came to public notice courtesy of The Millionaire Next Door by Thomas J. Stanley and William D. Danko, a book that has earned a spot on the registered rep's desk right there alongside the computer and the Rolodex. Because they can be both hard to find and underserved when it comes to financial products and services, Middle Class Millionaires can be seen as a prime example of the untapped assets and opportunity just waiting to be corralled.

Recently, Merrill Lynch Investment Managers commissioned Prince & Associates to conduct a survey of this group. Our goal was to learn more about who they are, what kinds of products and services they want and what they expected from their advisors.

The key fact we uncovered was that they didn't think of themselves as millionaires; indeed, their millionaire status had often arrived gradually and unexpectedly thanks to the combination of their salaries, long-term investments (notably pension plans) and inflation.

Most importantly from the registered rep's standpoint, they are very interested in products suited to their new financial status such as managed accounts, funds of funds and hedge funds (see chart). And they were looking for advisors who could show them the ropes. In short, they had a million dollars, but more often than not they didn't yet have a financial plan to go with the money.

Our Survey

In the first quarter of 2001, Prince surveyed 329 Middle Class Millionaires, with at least $1 million in investable assets, for Merrill. About 66 percent were men and 34 percent were women. Age-wise, 36.2 percent of the group was 45 to 55, 28.9 percent were 55 to 65, and 29.5 percent were over 65. Only a handful, 5.5 percent of the total, were aged 35 to 45. In terms of assets, 78.3 percent had from $1 million to $3 million in liquid assets that were not in a retirement account while the other 21.7 percent had more than $3 million. From a career standpoint, the group was fairly evenly divided among self-employed business owners, executives of publicly traded companies and professionals such as lawyers and doctors.

One of the key characteristics of the Middle Class Millionaires was that they didn't think of themselves as rich, although the taxman and most advisors would beg to differ. Indeed, Middle Class Millionaires were often surprised when they did the math and found out their total wealth had reached the seven-figure mark. And when asked, they still claimed to be members of the middle class despite their wealth.

That makes sense because, given the high cost of college tuition, housing and even retirement today, they were not rich in the sense of having nothing to worry about financially. A million dollars just doesn't stretch that far anymore. They were rich, however, to the extent that their wealth needed to be actively managed to their advantage from both the tax and estate planning standpoints.

How does this perception of their wealth play out for Middle Class Millionaires? First off, because of their background and definition of what it meant to be rich, they were not inclined to be ostentatious, not thinking about moving into a McMansion, not planning on buying a Humvee, not booking flights to Aspen. Based on our findings, this scaled-down self-image may make Middle Class Millionaires far more manageable and attractive as clients because they're less likely to demand the outsized returns they'd need to support a jet-set lifestyle. As a result, their financial goals and expectations may be easier to meet.

The Way to Wealth

This mixed reaction to their wealthy status probably says something about their upbringing and expectations. Also, the fact that they didn't think of themselves as wealthy may have stemmed from the fact that they didn't become millionaires overnight. They didn't inherit millions, they didn't engineer a stock market coup and they didn't hit the lottery. Instead, they became rich incrementally, through annual investments in 401(k) plans, by squirreling away money in bank accounts and mutual funds and by owning stocks for 10 or 20 years, not five years.

This gradual, almost stealthy path to wealth may help explain why Middle Class Millionaires didn't have financial plans in place that matched their assets; they were caught off guard by their own affluence. The slow and steady march to millionaire status also contributed to a collaborative mindset when it came to financial help. As a group, the Middle Class Millionaires were not overly impressed with themselves and their financial acumen; they understood the importance of professional advice, which explains why all of them already had at least one advisor.

At the same time that they understood the value of financial guidance, the respondents made it clear that they didn't favor going online to get it. In fact, of the 329 Middle Class Millionaires we surveyed, a clear majority felt that the kind of advice they wanted couldn't be delivered online. Well over half of them also thought that their financial situation was far too complicated to be handled over the Internet. A similar number said that they wanted to delegate their planning to a person, not a Web site, and also wanted the reassurance of working directly with another human being.

When it came to what products they wanted, our main finding was that Middle Class Millionaires wanted to move up the ladder to more sophisticated products.

They were less interested in products they associated with their pre-millionaire days — most notably mutual funds — than in products that targeted the special needs of a more affluent clientele.

And they were not unaware of their options; they had heard about exchange traded funds and hedge funds, for example, and they were interested in learning more. What they didn't know was how those various products would fit within their overall financial plan, and that was where they looked to professional advisors to help them put the products in perspective.

(In next month's column, we'll take a closer look at Middle Class Millionaires and their interest in managed accounts.)

Writers' Bios: Hannah Shaw Grove is a managing director at Merrill Lynch Investment Management.

Russ Alan Prince is president of Prince & Associates.

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