Wealth Managers on Clients’ Attitudes as 2012 Winds Down

This week, I was able to catch up with two wealth managers who always offer keen insights into how their ultra high-net-worth clients are feeling about things. These days, as it turns out, those clients aren’t feeling so great.

Given that the year is winding down on a more somber note than many might have anticipated, owing in part to some disappointing IPOs that overwhelmed the many good ones; looming changes in the tax code; and the endless barrage of worrying headlines from around the world (Syria, North Korea, Europe), it was no surprise to learn that even the most affluent are feeling a little nervous about their futures.

To learn more about their clients’ thinking, I asked the advisors – Stephen Goldbart, cofounder of the Money, Meaning & Choices Institute in Kentfield, Calif., and Harvey Armstrong, the executive managing director at Harris MyCFO in Palo Alto – to share what they’re seeing. Our conversation has been edited for length.

Partly because of the presidential election, partly because of Proposition 30, I’ve been hearing more entrepreneurs and investors complaining about California and their taxes and saying it feels like something is going to break. Are you seeing the same in your respective practices? Is anyone moving or threatening to move?

SG: Rich people in California always complain, particularly when they realize they see half a million dollars more in their tax bill than they were expecting. But a lot of our clients have already sold their businesses, so they’re managing portfolios of bonds and real estate. So I haven’t heard a single person talk about moving their residence.

HA: People talk about it but we don’t see it happen very often because a lot of startups, venture funding and talent is located in the Bay Area. So if you want to be part of that process, you have to be here a significant amount of time.

We see people occasionally leave when they’ve made money and don’t have anything holding them to California, but even then I’d say that for every 10 that study it, maybe one makes the move.

Some – few — entrepreneurs and investors appear to be spending more of their time outside of the state than in it to lessen their tax burden. Can you speak to whether you see the same in your line of work?

HA: It’s unusual, though there have been a number of cases with people pretending to live in Nevada, a zero-tax state.

People have to be careful with the state of California. It’s very aggressive about collecting revenue. When they do a residency audit – because they see someone is a partner in a deal here or has some other connection to California that landed them on [the government’s] radar screen – they look at hotel receipts, cell phone records, credit cards, even gas bills from the person’s residence. By the end of that audit, most things will be known [to the state]. If you’re here on a recurrent basis and you’re paid for your services here or you’re tied to a California employer or receive stock options [you have to pay California taxes on them].

Who do tax changes impact the most, based on your experience? Those who make their own money or those who’ve inherited it?

SG: The newly wealthy have psychological memories of not having money, so taxes heighten their anxieties, even when that doesn’t square with rational facts on the ground. When any expense means a change in your lifestyle, then you have reason to complain. But it’s not like [most multimillionaires] are cutting back on their lattes or not taking their trips. Most [tax increases] have no real impact on people’s lifestyles. The impact is on how they over consume.

Do you think your clients’ attitudes have changed at all over the past year with the presidential election and now all this talk of a fiscal cliff? Or would you say that they’ve remained pretty consistent over time?

SG: Over the last year, everyone, including the wealthy, is much more fear-driven, much more aware of risks. And uncertainty makes it hard to make decisions. So during a period when we’re not sure of what’s around the corner, people stall on making decisions. I’ve seen much more reluctance by my clients to start new businesses, for example, or to make big-ticket purchases.

But I think it’s larger than the presidential election or what’s happening right now in Congress and that it has more to do with the global economy and no one knowing who is driving what. If you’re running a business, you know your own market, but the larger economy has become global in a way that wasn’t necessarily planned out very well and that [features] many unknowns. In fact, I don’t think it matters much if we go off the cliff or not. People just want to know what happens next. It’s always been true of the market; the stock market hates unpredictability. It’s just human psychology.

Harvey, do you agree? Are your clients experiencing more financial anxiety than in the past?

HA: I’d say the state of the state and the state of the tax code is a problem. There’s so much uncertainty that it’s hard for people to plan. Estate and gift transfer taxes — that regime is changing, so people are hurrying to put in place gifting strategies over the next 10 days. So that’s creating a lot of motion and activity in the legal and accounting investment community right now. People worry that they’ll miss out on exemptions that are currently in place, so they’re trying to gift; they’re setting up trusts and making direct gifts to the trusts and trying to work with disposing of property [into trusts], which isn’t easy psychologically for most people to do.

As for globalization, I read about it and hear about it, probably like you do. But we can always probably list 15 things that are terrible in the world. That’s true today and that was true five years ago and 10 years ago. How many of those bad things really happened, I don’t know, but [from what I’m seeing], people generally have a positive attitude and are moving forward. Businesspeople and entrepreneurs are optimistic in nature.

Photo: Image courtesy of Shutterstock.

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