Why Aren't High Net Worth Investors Acting on Optimism?

The rich aren’t so different than anyone else. They just have better advice. Which is what makes their investing habits worth watching.

Like other Americans, high net-worth investors are feeling upbeat about the economy’s near-term fortunes of late, according to a new survey by the research firm Phoenix Marketing International. Among those with $1 million or more to invest, 53 percent described themselves as mostly or extremely optimistic in their outlook for the next three months—up 12 percentage points from January. The survey reached 1,175 respondents with its online questionnaire in late February and early March.

“It’s not unexpected given the turnaround in equity markets and better news from Europe,” says David Thompson, managing director of Phoenix Affluent Market. But in the five years his firm has been tracking these high rollers, Thompson adds, “it hasn’t jumped like that.”

Since high net worth individuals tend to move quickly on their perceptions of the market, it might be expected that their optimism would have them jumping into equities with both feet. In fact, most wealthy investors and their advisors told Phoenix they were happy to remain on the sidelines. “It’s a little puzzling,” says Thompson. “Investment did spike up toward end of 2011, then fell back.”

While high-earners increased their stock holdings slightly, they favored deposit accounts and retirement funds. Twelve percent of those Phoenix surveyed planned to decrease their stock portfolios, “a relatively high percentage, considering their ebullience,” reads the report.

Historically the investment intentions of the already well-to-do can be taken as a bellwether for the market. They are generally better informed, pay more attention and have the wherewithal to act quickly on their hunches. Their overall optimism has likely contributed to the reduced volatility of the Dow in recent weeks.

But they can also act contrary to their view of the economic situation. In May of last year, a similar survey by Phoenix showed that wealthy investors had gloomy view of the economy, yet they continued to put their money in stocks.

The high-netters’ present skittishness may indicate that the market’s recent gains are coming to an end. “They may be getting some advice that we’re seeing the highs right now and we make take a pause,” says Thompson.

"They may be getting some advice that we’re seeing the highs right now and we make take a pause." -Managing Director, Phoenix Affluent Market, David Thompson

But there may be other factors in what makes millionaires feel good about investing. The recession dealt a blow not only to investors’ confidence in the economy, but in the advice they were getting and the financial products they’d been sold.

“One thing that affects the high net worth outlook is how they feel about financial firms,” says Katharine Wolf, an associate director at Cerulli Associates, a Boston-based group that studies how investors interact with their advisors and helped Phoenix with their survey.

During the downturn, the wealthy sought second opinions or switched investment houses outright. After shopping around, many million-dollar-plus investors have found a level of trust lost over the past few years, and have gained a working familiarity with which products work in the new landscape. “Their satisfaction with their advisors is starting to creep back up,” observes Wolf. “As a reason for the recent optimism, this should not be discounted.”

A honeymoon does not a marriage make, however. The high net crowd may be waiting to see whether their new relationships and new financial instruments yield actual earnings before they commit with serious cash. Until then, as in any marriage, a happy disposition is a good start.