(This is the first of two articles about Internet millionaires — yes, there are some — their interest in various high-end products and services and their expectations from financial advisors.)
It's been two years since the Nasdaq topped 5,000 and dot-com millionaires were the undisputed heroes of the New Economy. Now the Nasdaq hovers around 2,000, most Internet entrepreneurs either are out of a job or reviled for having taken the money and run and the term “New Economy” is used as a punch line.
Research that we conducted this year, however, shows that while their financial priorities may have changed, e-millionaires — those who made $1 million or more through their direct involvement in the Internet (that is, not simply as an investor) — are still very much alive, well, wealthy and interested in high-end products and services. And their changing interest level in those various products and services can be seen as representative of the feelings of other affluent clients caught in the current downturn.
Back in 1999, we conducted an extensive study of 652 e-millionaires with a total of $13.3 billion in assets. Importantly — and this explains why they're still around and investing — our e-millionaires had to have at least $1 million in investable assets on hand. They couldn't be paper millionaires whose wealth was based on stock options that have since proved worthless.
We found that, from the registered rep's standpoint, it was an attractive and intriguing group. Of the 652 e-millionaires we surveyed, nearly half had $10 million or more in liquid assets and one-third had more than $20 million. When measured by age, investment goals, or their feelings about financial professionals, the e-millionaires were very different from traditional affluent investors.
They were by and large much younger, having made their millions in a hurry. Based on their business experience, they had a high need for control and wanted any advisor they worked with to keep them informed every step of the way. Because they were new to being rich, they were also learning as they went and were very much aware of the importance of having advisors in their corner.
When asked about financial products, they were interested in moving assets into the higher end of the financial spectrum. Only 3.2 percent had money in a hedge fund, for instance, while 81.4 percent were interested. And just 8.3 percent had funds of funds while 69.6 percent were interested. On the flip side, 75.5 percent had money in mutual funds but only 16.6 percent were interested. They were ready to step up the ladder, product-wise.
When it came to financial advisors, most of whom came to them through peer referrals, the most important fact is that e-millionaires had an average of 4.7 advisors working for them. The combination of the amount of money, the relative lack of financial experience and the number of advisors per e-millionaire added up to an excellent opportunity for those advisors looking for wealthier clients.
As we learned in our more recent study, that opportunity remains. This year, we went back and interviewed 188 of the original 652 e-millionaires. Though the growth rate of new e-millionaires has understandably slowed, there are still by our analysis 8,364 e-millionaires in the United States who control slightly more than $300 billion in investable assets. We also found that the average number of investment advisors per e-millionaire has increased since our first study, rising from 4.7 to 5.1. Furthermore, nearly three-quarters of the group, 139 out of 188 e-millionaires, had changed their primary advisors in 2001. That doesn't mean that those advisors had been dropped; it just meant they were no longer controlling the highest percentage of client assets. The previous primary advisors had been moved from the starting lineup to the bench.
So we established that there was still very much a market for advisors — and a fluid one at that, given how often they switched their primary advisor. We then wanted to know if there was any change in the interest level of e-millionaires for financial products since our first study, and, as illustrated by the chart at right, there was.
Hedge funds, the product that e-millionaires were most interested in the first time around, had become even more attractive. Then and now, part of the appeal of hedge funds was the cachet — the garden variety affluent have mutual funds, the super-rich and sophisticated investors have hedge funds. But the interest level has also increased because e-millionaires in 2002 felt that hedge funds had the top money managers and because they were seen as being counter-cyclical, which is important given the market upheaval of the past two years.
While e-millionaires were still very much interested in private money managers, the level had fallen off somewhat since 1999. That's because a lot of the top managers have a signature investment style — growth, value, mid-cap — and very few have gone unscathed during the last two years. The lack of diversification has led investors to seek safer, as in more diverse, ground. That also explains the decline in interest in managed or wrap accounts.
| Product | Original Study | Re-evaluation |
|---|---|---|
| in percentages | ||
| Hedge Funds | 81.4 | 88.9 |
| Private Money Managers | 73.8 | 61.7 |
| Funds of Funds | 69.6 | 91.2 |
| Managed or Wrap Accounts | 58.9 | 46.5 |
| Private Equity Funds | 53.7 | 12.1 |
| Source: Prince & Associates 2002 | ||
Funds of funds enjoyed the biggest bump on the upside because they combine the benefits of hedge funds mentioned above with superior diversification.
Finally, it's hardly surprising that private equity funds have fallen from favor given the losses that have been piled up over the last two years. Even in 1999 when there seemed to be unlimited opportunity to make money by investing in start-ups, only half of the e-millionaires were interested, possibly because, as Internet veterans themselves, they were well aware of the risks and uncertainties involved.
Next month, we'll take a look at e-millionaires and their interest in such services as tax management, asset protection and offshore accounts.
Writers' BIOS:
Hannah Shaw Grove
is a managing director at Merrill Lynch Investment Managers.
Russ Alan Prince
is president of Prince & Associates.