Thanks to the market volatility of 2015, a majority of millionaires are approaching investments in 2016 with a more conservative mindset. More than half (54%) of millionaires with a net worth up to $5 million (not including primary residence) plan to put money in checking/savings accounts, while half will invest in mutual funds, according to a recent study by the Spectrem Group called Asset Allocation,
Four in ten will invest in
Read on for more insights into how the wealthiest clients are likely to be best served this year and beyond. (For related reading, see: 6 Investing Mistakes That the Ultra Wealthy Don't Make.)
When it comes to achieving their current financial goals, millionaires consider market conditions to be the most serious threat. Spectrem points out that amid concerns about Federal Reserve would raise interest rates, the Dow Jones Industrial Average (DJIA) and the S&P 500 Index posted their worst years since 2008. In 2015 the Dow was down 2.2%, while the S&P 500 was down 0.7%.
Age also plays a significant role in determining the likelihood of how millionaires plan to invest in the long term. Millennials are the most likely to invest in most investment vehicles. As time is on their side, they are less risk-averse than older generations. Three-fourths of the youngest millionaires surveyed, for example, are likely to invest in stocks. This compares to only 40% of Baby Boomers and seniors ages 65 and up.
There is less of a gap between Millennials and older investors in the likelihood of investing in checking/savings accounts and mutual funds. (For related reading, see: Wealth Management: How the Billionaires Do it.)
Level of Wealth
In general, the Spectrem study found that the likelihood of investing in a specific vehicle increases with net worth. For example, millionaires with a net worth between $3 million and $4.9 million are most likely to invest in stocks in the next year (47%) versus 40% of respondents with a net worth up to $1.9 million.
Senior corporate executives, meanwhile, show the highest likelihood that they will invest in mutual funds (63%). The highest percentage of business owners will invest in stocks (49%).
Interest in robo-advisors is growing among all age groups and wealth segments—not just the young, the research found. The study examined investors from different wealth segments: the mass affluent or those with $100,000 in net worth and up to ultra high net worth investors, who have net worth up to $25 million.
The young mass affluent are the most invested in robo-advisors. While almost half have managed account programs, 9% have accounts managed by robo-advisors. This includes 23% of mass affluent investors under the age of 36. Fourteen-percent of mass affluent investors between the ages of 36 and 44 have accounts with robo-advisors. (For more, see: Robo-Advisors and a Human Touch: Better Together?)
Millionaires are almost as invested in robo-advisors as the mass affluent. Nine percent of millionaires have accounts managed by robo-advisors, although more have managed accounts (53%) headed by human advisors. Almost 28% of millionaires under the age of 55 have accounts managed by robo-advisors. That includes 16% of millionaires between the ages of 45-54.
Overall, ultra high net worth investors are slightly less enthusiastic about robo-advisors. Only 8% have an ongoing relationship with one. Interest among young ultra high net worth investors, however, is higher. Forty-five percent of ultra high net worth investors under the age of 48 have robo-advisor accounts.
Perception of Robos
Many of these investors do not know what their robo-advisor managed accounts hold. Those that do are invested in equities the most. Thirty-eight percent of assets held by robo-advisors for ultra high net worth investors are in equities, with 19% in fixed income.
In separate research, Spectrem found that 25% of ultra high net worth investors believe that robo-advisors can do most jobs asked of human advisors. In fact, 34% believe that a robo-advisor could match a human advisor’s performance in selecting investments for a retirement plan.
The good news for advisors is that Spectrem’s data show that few investors believe robo-advisors are better equipped to handle investment assignments. But if investors believe a robo-advisor is equally adept at an investment task and the robo-advisor costs less, it is understandable why an investor might choose to work with a robo-advisor, Spectrem maintains.
“It is up to advisors and financial providers to explain and illustrate how working with human advisors is more profitable than working with robo-advisors,” Spectrem said in the report.
The Bottom Line
Advisors should be aware that millionaire investors are entering 2016 with a more conservative mindset thanks to the market volatility that reared its head in 2015. They should also take note that robo-advisor use among the wealthy is growing in popularity overall, not just among younger investors. In order to compete, advisors need to make it clear why working with them versus a robo-advisor is more worthwhile.
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