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Jerry K.
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What factors do wealthy people use to choose investments?

Jerry K.
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  • Phoenix, AZ
Posted May 2 2012, 11:56

What do you think a person who is worth between $5 million and $25 million dollars would consider the most important to the least important when looking at investment choices?

I just read an article from a Family Office consulting company with results from their survey of wealthy clients ($5 million to $25 million net worth minus principal residence) and it was interesting to see the results.

"Family Office" is a term used for a wealthy family that has considerable wealth and creates an office to manage the family wealth. They hire their own accountants, investment officers, etc. all just to manage and keep track of the investments and cash streams.

Before I show the results, I wanted to survey the BiggerPockets group and see how you think that wealthy group would rank these investment criteria:

Social responsibilty of the investment
Tax implication of investment
Diversity of investments
Reputation of companies where investments are made
Risk level associated with investment
Past track record of investment

These were the top 6 criteria but not in the order I just listed. What order do you think a $5 million to $25 million person would rank these factors?

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Will Barnard
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Will Barnard
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ModeratorReplied May 2 2012, 12:03

Here would be my order of those listed:
1. Past track record of investment
2. Risk level associated with investment
3. Tax implication of investment
4. Reputation of companies where investments are made
5. Social responsibilty of the investment

My list would include other factors such as level of activety (passive vs active), COC return, ability to mitigate risk, ability to protect principle while keeping growth, and a comfortable margin between income streams and growth.

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Paul H.
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Paul H.
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Replied May 2 2012, 12:23

My guess:

1. Risk level associated with investment.
2. Past track record of investment
3. Diversity of investments
4. Tax implications of investment
5. Social responsibility of the investment
6. Reputation of companies where investments are made.

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Account Closed
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Account Closed
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Replied May 2 2012, 12:29
Originally posted by Jerry K.:

These were the top 6 criteria but not in the order I just listed. What order do you think a $5 million to $25 million person would rank these factors?

My guess:
1. Social responsibilty of the investment
2. Past track record of investment
3. Tax implication of investment
4. Risk level associated with investment
5. Reputation of companies where investments are made
6. Diversity of investments

I'll be curious of the results. If I understand the survey it was of family offices and was essentially the criteria that they give them when making investments. The list would not be the same if it was the wealthy clients stating what was important to them in a general survey.

My list would be different and some of these issues would not rise even close to the top. but other reasons not listed would be.

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James H.
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James H.
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Replied May 2 2012, 12:31
Originally posted by Jerry K.:
"Family Office" is a term used for a wealthy family that has considerable wealth and creates an office to manage the family wealth. They hire their own accountants, investment officers, etc. all just to manage and keep track of the investments and cash streams.

The whole list sounds important. But more importantly, I know at least 3 people with a net worth in this range and although they certainly spend money on financial services, not a single one would open an office and carry that kind of payroll just to manage their money. So I am surprised that one would at that level of wealth.

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Chris Masons
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Chris Masons
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Replied May 2 2012, 12:40

The company I work for has a "Family Office" division that they service.

If I had to guess the order it would be:

1 Risk level associated with investment
2 Tax implication of investment (very tempted to put this # 1)
3 Past track record of investment
4 Reputation of companies where investments are made
5 Diversity of investments
6 Social responsibility of the investment

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Tod R.
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Tod R.
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Replied May 2 2012, 12:47

Based on my interaction with a family office, I would guess:

1. Risk level associated with investment
2. Diversity of investments
3. Tax implication of investment
4. Past track record of investment
5. Reputation of companies where investments are made
6. Social responsibility of the investment

The main theme was risk aversion.

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Paul M.
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Paul M.
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Replied May 2 2012, 13:00

Social responsibility I think is going to rank a little higher than expected. These are people who are climbing higher rungs of Maslow's hierarchy. Though of course responsibility is in the eye of the beholder.

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Jerry K.
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Jerry K.
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Replied May 2 2012, 14:09

I'll post the results tomorrow (Thursday May 3rd) during the day to give a few more people a chance to answer tonight.

As background, my day job has been working with Family Offices since 1992 so I get a lot of research material for this segment of the market.

Brian Hoyt - you are right, it usually takes $100 million in net worth to support a Single Family Office - but many in the range listed for this survey become part of a Multi-Family Office that services several wealthy families. Lower expenses for the client.

Will Barnard and Charles Perkins - I'm sure the survey had other factors, but they listed only the top 6.

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Luc M.
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Luc M.
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Replied May 2 2012, 14:18

I am going to guess the following:

1 Risk level associated with investment
2 Past returns of investment
3 Tax implication of investment
4 Diversity of investments
5 Reputation of companies where investments are made
6 Social responsibility of the investment

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Maximilian Benjamin
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Maximilian Benjamin
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Replied May 2 2012, 14:54

Hmmm...to be a little different;

Risk level associated with investment
Tax implications of the investment
Past track record of investment
Social responsibility of the investments
Diversity of investments
Reputation of companies where investments are made.

Can't wait to see the results.

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Rich Weese
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Rich Weese
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Replied May 2 2012, 16:13

This is my order.
Reputation
Risk
tax implication
Past track record
Diversity
Social

Wealthy have many more investment options/opportunities and will look at it differently than non wealthy, imo. These choices are assuming that the mega wealthy are older and therefore the top 4 would be most important. Rich

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Bryan Hancock
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Bryan Hancock
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Replied May 2 2012, 17:00

Here is where I think they will rank for wealthy folks:

1. Tax implication of investment
2. Risk level associated with investment
3. Past track record of investment
4. Reputation of companies where investments are made
5. Diversity of investments
6. Social responsibilty of the investment

Here is how I would rank them:
1. Past track record of investment (potential returns)
2. Risk level associated with investment (perceived risk)
3. Reputation of companies where investments are made (track record after 1 and 2 match up)
4. Tax implication of investment (taxes distant consideration....trying to maximize after-tax ROE)
5. Social responsibilty of the investment (more distant than tax considerations)
6. Diversity of investments (who cares? I can diversify on my own)

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Jeff S.
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Jeff S.
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Replied May 2 2012, 22:08

Assuming multiple portfolios starting with fixed income, RE, businesses, then investments an advisor might bring:

1. Past track record
2. Reputation
3. Tax implications
4. Risk
5. Diversity

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Jerry K.
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Jerry K.
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Replied May 3 2012, 08:28

Here are the results of the survey conducted by Spectrem Group of Lake Forest, IL. They're a consulting and market research group that specializes in the wealth management and retirement industries with a focus on the affluent segment.

This survey was conducted during the first quarter of 2012 among affluent individuals with a net worth of between $5 million and $24.9 Million.

It turns out this survey is actually answered by the welathy individuals themselves - not their employees.

The order of Investment Selection Factors for this segment were:

1. Risk level associated with investment (95% ranked this highest)

2. Diversity of investments (91%)

3. Tax implication of investment (86%)

4. Reputation of companies where investments are made (83%)

5. Past track record of investment (74%)

6. Social responsibility of the investment (27%)

Some of the commentary in the article about the survey;

55% said it is more important for them to protect principal rather than grow investments (up from 44% last year) .

Not surprisingly, as far as risk goes, those over age 65 take the least amount of risk and those under age 45 are willing to take the most risk.

While social responsibility is lowest at 27% it is growing higher each year.

One other interesting tidbit they included in the article was a list of factors that these high net worth people attributed to their obtaining and holding their wealth;

96% say Hard Work - is the main contributor to achieving their wealth

91% Education - is main contributor

87% Smart Investing - is main contributor

61% Risk Taking

In a show of growing confidence, they found 42% of these folks are willing to take "significant investment risk" on a portion of their investments this year. That is up from only 26% in 2011.

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James H.
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James H.
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Replied May 3 2012, 09:10
Originally posted by Jerry K.:

96% say Hard Work - is the main contributor to achieving their wealth

91% Education - is main contributor

87% Smart Investing - is main contributor

61% Risk Taking

I don't understand how the pole was taken. It appears that there is 335% of respondants in the survey. Were they given the option of having more than one main contributor? I am really interested in the results and just looking for clarification on how the survey was conducted - not trying to nit pick.

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Jerry K.
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Jerry K.
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Replied May 3 2012, 13:46

Brian Hoyt - The way I presented it is confusing - sorry. They listed a number of factors for the wealthy individuals to choose as being important to obtaining their wealth.

So they could pick more than one. They didn't rank these factors, they just picked the ones that were most important to them.

So 96% included Hard Work in their lists. 91% of them included Education and so on.

It would be like voting for your favorite factors - and you can vote for more than one factor. Hard Work had the most votes, Education had the second most votes, etc.

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Tod R.
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Tod R.
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Replied May 3 2012, 14:06
Originally posted by Jerry K.:
96% say Hard Work - is the main contributor to achieving their wealth

91% Education - is main contributor

87% Smart Investing - is main contributor

61% Risk Taking

Thanks Jerry that was interesting. I think Hard Work is the main factor that separates the pros from the amatuers.

I wonder if Lucky or Inheritance made it very high on the list? :)

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Jerry K.
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Jerry K.
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Replied May 3 2012, 14:31

Tod R. In all the articles and papers this firm publishes "Lucky" never is on the lists! Inheritance does pop up, but not as often as you would think.

It was interesting, in this issue where I pulled that survey, they had an article about Millionaire Teachers. Their research shows that 14% of the 8.6 million millionaires in the USA are educators/teachers.

Educators were the only group that had "Inheritance" in the top 5 factors for obtaining wealth. 46% of the educators that are millionaires attributed their wealth primarily to "inheritance".
l

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Tod R.
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Tod R.
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Replied May 3 2012, 14:51
Originally posted by Jerry K.:
It was interesting, in this issue where I pulled that survey, they had an article about Millionaire Teachers. Their research shows that 14% of the 8.6 million millionaires in the USA are educators/teachers.

This got me very excited since my daughter is going to Tx State for 5 years to be a teacher!!!!!

Educators were the only group that had "Inheritance" in the top 5 factors for obtaining wealth. 46% of the educators that are millionaires attributed their wealth primarily to "inheritance".

This brought me back to reality....

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Jeff Arndt
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Jeff Arndt
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Replied May 3 2012, 15:19

I wish I had my copy of Millionaire Next Door but I lent it to my brother. In it, it states that of the affluent, most spouses do not work. And of those spouses that do work, something like 50% of them are teachers.

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Tod R.
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Tod R.
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Replied May 3 2012, 15:59
Originally posted by Jeff Arndt:
I wish I had my copy of Millionaire Next Door but I lent it to my brother. In it, it states that of the affluent, most spouses do not work. And of those spouses that do work, something like 50% of them are teachers.

I wonder if that's because some wealthy families feel a responsibilty to give back to society in some way.

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Jerry K.
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Jerry K.
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Replied May 3 2012, 17:34

Jeff Arndt - I love Thomas Stanley's books! I was hooked on his books before he ever wrote The Millionaire Next Door. In another thread on the forum I just wrote about my experience at age 23 of being a stockbroker and how the manager was a short sighted and wanted us all to mainly cold call to get clients.

I was better with face-to-face introductions and attracting prospects to me instead of me hunting for them with cold calls.

A couple of years after I left being a stockbroker I stumbled onto Stanley's book "Networking with the Affluent and their Advisers". Man, I wish that book was written when I was broker.

That book led me to his 2 earlier books "Marketing to the Affluent" and "Selling to the Affluent".

He was college professor at the time he wrote those books and he interviewed millionaires to find out how they got their wealth and how they chose investments and financial services. He then interviewed the most successful sales people who marketed to the millionaires.

To this day I re-read those books. I have a couple of side businesses that thrive by selling to an affluent market and I have been working with the Uber wealthy family offices since the early 1990's.

It's about time I re-read Millionaire Next Door.

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Joe Bertolino
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Joe Bertolino
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Replied May 3 2012, 17:50

Some will take this the wrong way but I come from a family of teachers... A lot of trust fund kids go into teaching because they get 4 months off and it is a respected profession.

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Sandy S Harris
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Sandy S Harris
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Replied May 3 2012, 18:02

Thanks Jerry K. for this thread-very interesting. Actually, it isn't surprising to me that social responsibility is the last criteria in the poll. It is nice, however, to see that those numbers appear to be rising.

I too am a big fan of Thomas Stanley. Read Millionaire Next Door-and a few of his others-years ago. Jeff Arndt, if I remember correctly, in addition to many of the spouses who stayed at home, and in contrast to the general population, many of those that Stanley interviewed had never gone through a divorce. Something to ponder...

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Jerry K.
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Jerry K.
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Replied May 3 2012, 18:24

Sandy S Harris - I don't remember which book of Stanley's it was in, I think one of the early books, but he tells of how he was interviewing deca-millionaires. A man came in and as he went through the preliminary information, the man said he owned a single drug store.

Stanley was almost too embarrassed to bring it up, but reminded the man that they wanted to interview people with net worth of $10 million and up.

The man said he had that level of net worth. It turned out as the town's pharmacist, he knew when the local business owners were having to take medications for illnesses that would require them to sell their businesses. Basically, he knew before the owner would realize they would have to sell their business for health reasons.

The drug store owner had a healthy side business as a Business Broker and made way more money brokering businesses than he did as a pharmacist.