Race for rich leaves Middle America in the dust

New study: Six-figure nest eggs up for grabs

While everyone is chasing rich clients these days, one group of investors who are building sizable assets is being ignored – middle America.

A new study by Washington’s Consumer Federation of America reveals that low- to middle-income households are sitting on six-figure nest eggs.

The study shows that 26% of families with annual incomes of $10,000 to $25,000 and 38% of families earning $25,000 to $50,000 have net assets of at least $100,000. The CFA, which studies wealth building for less affluent households, and San Francisco’s Providian Financial Corp. used 1998 Federal Reserve Board data in the study.

“For people with [current] incomes between $10,000 and $25,000, over half had six-figure assets over the age of 65,” says Stephen Brobeck, executive director of the CFA.

Yet low- or middle-income earners are either getting wrong advice or no advice at all, he says.

“Most of the public doesn’t have access to planners, because they don’t have sufficient assets,” says Mr. Brobeck, reasoning that financial advisers target wealthier clients to generate fees.

Catherine Montalto, the Ohio State University associate family economics professor who conducted the study, suggests that the results will be revealing for financial planners.

“For planners, this [study] would support [the idea] that there are middle-income families out there that have an amount of wealth to be managed,” she says.

While the median annual income in the United States is less than $40,000, 56% of American households with someone older than 45 have net assets of $100,000 or more.

bad advice

Mr. Brobeck criticizes some of the investment advice lower-income earners have received.

“In the last couple of years, some advisers were recommending to clients that they borrow on home equity and invest in the stock market,” Mr. Brobeck says.

“That was irresponsible.” Lower-income people just starting to save “shouldn’t be taking large risks,” he says. “We find they’re risk averse.”

Lewis Altfest, president of L.J. Altfest & Co. Inc. in New York, which manages more than $150 million, argues that the finger of blame should not be pointed at advisers, as the low-income market is difficult to target.

“That market is home equity and 401(k). Both of those are not really adviser markets, particularly fee-only adviser markets,” Mr. Altfest says.

“If they’ve really accumulated meaningful dollars – at least $50,000 – in an account that’s now in a rollover format, then they might want to go to an adviser for one-time asset-allocation recommendations,” he adds.

“A person making $10,000 to $20,000 is not likely to go to an adviser.”

One way advisers can provide financial advice to lower-income earners, however, is to target large employers and provide educational sessions on savings tips.

“We’ve done that,” Mr. Altfest says. Sacred Heart University in Fairfield, Conn., provided funding for his company to provide advice for all its employees.

“We gave advice – from the president to the maintenance person” – he says, meeting with employees one-on-one for 45-minute sessions. “That was very successful – a lot of it was plain saving and how to asset allocate.”

But “if you’re looking for ongoing clients, that area is not going to serve as a lure.” L.J. Altfest & Co. requires a minimum of $500,000 in assets for continual client management.

Ms. Montalto suggests that many lower- to middle-income earners might shy away from consulting financial advisers because they believe that building wealth is beyond their means.

Myths

Advisers may need to try to “dispel some of the myths that it has to be stocks and business ownership to build wealth,” Ms. Montalto says.

“You can really build wealth with home-equity and retirement accounts. It may help encourage more savings and wealth building in the United States.”

Mr. Brobeck concurs: “The younger folks under 45 express great pessimism about being able to accumulate wealth.” It is critically important for people to start saving as young as possible, he notes.

The CFA says that most people – even those of modest means – should be saving in addition to participating in retirement plans.

“Those dollars they invest and save in their teens and 20s amount to an awful lot more than savings [made] even in their 30s,” he says.

As well as recommending that lower-income earners purchase U.S. savings bonds or mutual funds through automatic bank-account deductions, Mr. Bobreck says that retirement and paying off the family home should become their main goals.

Paying off a mortgage is a forced-savings tool, provided homeowners don’t borrow against their home equity, he says. And paying off home mortgages before retirement will dramatically reduce living expenses.

“Lowering your living expenses by $10,000 [a year] is like a $10,000 boost in income, and you don’t pay taxes on it,” he says. “That is what almost all middle-income Americans should aspire to. If they don’t, they may not be able to afford to retire.”

Mr. Brobeck says lower-income earners also should be encouraged to take advantage of employee retirement savings plans. While slightly more than half of all workers have access to retirement plans through their companies, earlier CFA research shows that few people take full advantage of employer matches for their savings.

At the press conference in Washington at which the studies’ findings were announced, Providian Financial chairman and CEO Shailesh Mehta announced a two-year, $200,000 grant to support local campaigns of CFA’s America Saves program to encourage and assist people, especially those with low or moderate income, to save and build wealth.

The Bank of America Foundation is developing an American Saver newsletter, which will start publication this month, an interactive website to be launched in the fall and technical assistance to communities that want to organize local savings campaigns.