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One-Percent Solution
U.S. Trust's Funck discusses the rich and their money
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Business New Haven
7/8/2002
By: BNH
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W. Michael Funck is chief executive officer for Connecticut of the Unites States Trust Company, which regularly surveys the top one percent of wealthiest Americans regarding their backgrounds, financial concerns and investment attitudes. Statistically speaking, the sample (150 respondents) is small, but their answers provide useful anecdotal information about the rich and how they hope and plan to remain so.
One of the most striking findings of the survey was that a healthy majority - 58 percent - said that, in the wake of the Enron scandal - they no longer trust independent auditors. If credible independent financial oversight no longer exists, what does it mean for the economy?
I think you're seeing some of the fallout from that. Every day some news comes along about a company or auditors. This survey addressed terrorism and the bear-market mentality. A lot of that is driven by peoples' concerns and dissatisfaction with what companies are reporting. So long as that [attitude] exists the government and the public and everyone will be crying for change to the point where once we get beyond that, the bear market attitude will slip away and we'll see a more positive response.
Similarly, almost three-quarters (73 percent) of respondents said they do not trust the recommendations of equity analysts, and two-thirds do not trust the corporate managements of publicly traded companies. If that is so, how do they choose what companies to invest in?
You have to rely on good advisors, and that's why we remain in the business. If you are an investment advisor these days and you've done the job for your client, you're looking at a well- diversified portfolio - and equities [are] just a portion of that. You saw some statistics in the report that people are trimming back on equities, but you also saw that 52 percent of the people said they are not going to abandon the equities market and 18 percent beyond that were suggesting there were buying opportunities. So 70 percent of those same people who were questioning those points that you just made were also suggesting that longer term, they have great belief in capitalism. The [equities] markets have traditionally been the best return over time and if you can get past these short-term problems, they look at the markets again as where they want to be longer-term.
You survey says that 95 percent of respondents' investment portfolios lost money since March of 2000, but 52 percent said they 'are not making any changes to their portfolios. Since these people obviously are not foolish, do they simply not know what changes to make?
There's a longer-term belief. This group may be a little older than the general population, but if people have been through rugged market conditions before and have seen the backside of that and the recovery period, it's fair to assume that they would see some light at the end of the tunnel. We're looking for companies with good earnings and good management and good futures. What's crippling the whole process is that some reputable firms were exaggerating their earnings and other things to the point that advisors and the general public were being duped. People aren't happy about that. So they're striking back in the survey that they're looking for tighter controls. It is kind of a paradox in that you would expect that people who fall into the affluent category and have net worths of over $3.75 million, in times past would be looking for less regulation, but now their crying for tighter regulation. They're questioning financial statements and management. That's a short-term phenomenon, but it's driven by the fact that every day in the press there seems to be another new company surfacing with these types of problems. There are 10,000 or more companies in this country and we're talking about a handful. They're major companies. But if we believe that American business is one of integrity and strong - and if we get the problem children out of here - the assumption is that people will find comfort.
How has the investment profile of affluent Americans changed over the nine years U.S. Trust has been conducting this survey?
Not a lot. I've been around through that entire period and there's always been a representative broad-based allocation. If you make the comparison between 2002 and 2001, you'll see that there were categories of investments in stocks, bonds, real estate and cash, and I believe that has been the general mix over the years. In the '90s when everything was being created and a lot more new products were coming out, there were a lot more different types of hedge funds and venture capital and esoteric types of investments. Some of those were very stable, but some of those funds lost tremendous amounts, too, so these were creative types of investment products. Most worked; some didn't. I think in the '90s, when everyone was looking for even greater returns than the norm - the norm was 20 to 30 percent a year in growth and that's spectacular. There was a lot more aggressive investing going on, looking for added returns, and if see what the group is suggesting is their hope for return over the next year, it was only eight percent. I say 'only' because now we're not even in a positive number. Over the next ten years, they're looking for closer to ten percent. Those were much more original returns and much more realistic. I think people have settled down and learned their lesson, but they want to have enough confidence in business to find good companies and management so they can get those returns.
Why does U.S. Trust do this survey? And why should the other 99 percent care what the one percent frets about?
We are in the wealth-management business and when the survey started in 1993, we were in the throes of expanding nationally. The reason we do the survey is to get a reading on more of a national basis. It became the preeminent survey of its time, dealing with the affluent.
Why should the other 99 percent of the world care about this? The affluent group is often a bellwether of the thinking of the greater public. It's a very high percentage of people who, either through mutual funds or 401(k) plans, or other types of retirement plans, have an interest in the markets now. They did not necessarily have that ten or 15 years ago. When you're talking about some topics that are so current, these are things that people are reading about in their newspaper every day and here they get a sense of how people who have higher means are troubled by exactly the same thing. This group is not dismissing it. They're as troubled as the general population.
How might concerns about personal security change affluent Americans' investment habits?
My family and I always made a family trip out to the Midwest for a family reunion, but since September 11 we've stayed much closer. People are fearful that terrorists could infiltrate Milwaukee or Los Angeles. This is not a problem isolated in one major city in America. I think that everybody fears it and looks to it as something we all have to keep a watchful eye. It's a top concern - 76 percent of the people said this is their chief concern. These are not the happiest of times and people are doing their very best to work through it and live normally. They say that 41 percent of people surveyed want to simplify their lives and spend more time with family and children and have a better health regimen. But they're not leaving their jobs, everyone is staying the course to not let terrorism defeat us, but there still is an overriding concern.
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