The rich are different from you and me, according to F. Scott Fitzgerald.
But according to Northern Trust Corp.'s annual Wealth in America survey, younger millionaires are very different investors than those of older vintages.
In fact, the survey found that respondents ages 28 to 42 with more than $1 million in liquid assets were more likely to own more alternative assets and new investment products, make fewer changes in their portfolios and hold more cash than older investors.
What's more, younger millionaires are, perhaps surprisingly, more likely to work collaboratively with their investment advisers than are older generations of investors, according to the survey.
Nearly a quarter of the younger millionaires' portfolios are allocated to alternative investment classes such as hedge funds, private equity, investment real estate and commodities, according to the survey.
By contrast, the survey found that baby boomers, ages 43 to 62, are allocating 14% of their portfolio to alternatives, while members of what the survey characterized as "the silent generation," ages 62 to 77, invested just 10% of their portfolio in alternatives.
HIGHER RETURNS
The benefits of alternative asset classes include superior returns and diversification, according to John Skjervem, chief investment officer of personal financial services for Chicago-based Northern Trust Corp. But those benefits have "come at the cost of reduced yield and liquidity," which can turn off older investors.
By contrast, alternative investments appeal to younger investors because "they are often still working and can use wage income to support their current lifestyle needs," Mr. Skjervem said.
To date, the younger millionaires have been more satisfied with the performance of alternative investments than older generations, according to the Wealth in America survey.
Fully 60% of younger millionaires reported that returns on hedge fund investments exceeded their expectations, for example, compared with 23% of baby boomers and 33% of the silent generation.
But getting good information about alternative investments can be hard, said Stephan Horan, head of private wealth for the Charlottesville, Va.-based CFA Institute. "Information on underlying assets in some alternatives is often opaque, making it difficult to evaluate them in a meaningful way," he said.
When it comes to working with financial advisers, 61% of the younger millionaires said they preferred a collaborative relationship, as op-posed to relying solely on their advisers or doing it all themselves.
By contrast, 53% of silent generation millionaires and just half of millionaire baby boomers said they preferred to work with advisers when making investment decisions.
Older investors often found it difficult to talk about money in non-confidential settings, Mr. Skjervem said.
Although the younger investors weren't similarly constrained, their propensity to talk frequently, openly and publicly about investments can also be problematic, he explained.
"They're so open about discussing investments that they can be impulsive, which can result in rash decisions," he observed.
Younger investors' desire to take an active part in decisions can be traced to "information flow," according to John Blood, vice president and chief market strategist for Commonwealth Financial Network of Waltham, Mass.
"Today's investors are so much more tech-savvy, and have access to such a greater degree of information, that they feel empowered to do it themselves," he said. "They're more likely to come to their financial advisers with ideas of how they'd like to invest. They want to be involved."
But financial advisers, Mr. Blood added, "can really earn their keep" by tempering their younger clients' impulses.
"As cutting-edge and sexy as something may sound, sometimes it's more important what you don't invest in than what you do," he said. "You have to be aware of the Lake Wobegon effect, especially when it comes to alternative investments — all the children are not above average."
The Wealth in America study was based on a survey and interviews of more than 1,000 millionaire households conducted in October and November by Phoenix Marketing International of Rhinebeck, N.Y.
Charles Paikert can be reached at [email protected].
