PLANNING–Managing Stock Fortunes Is Riskier in New Economy

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Imagine being a money manager with a new client who’s an Internet entrepreneur. His company either went public or merged with another company, leaving your client, on paper at least, a tidy fortune. That is, until the recent stock market turmoil, which has halved the net worth of your client, who is now calling you up in panic.

Mike Rogers, a strategist for Merrill Lynch & Co.’s high-net-worth practice in Beverly Hills, had just such an experience recently. A client had recently sold her Internet-related business for “somewhere around $100 million,” virtually all of it in stock. But the tech stock shakeout on Wall Street dramatically cut into her wealth.

“She went down to $35 million or $40 million in a period of 90 days,” Rogers said. “And there was nothing anybody could do about it.”

For the investment professionals who cater to the very rich, the stock market’s nine-year bull run has created a slew of new clients, who have created or inherited a lot of money and want to make sure they keep it. Traditionally that task, while not easy, follows one easy-to-explain rule that money managers share with their clients: diversify your holdings. Put some of it into steady growth stocks, some into bonds, perhaps some in real estate ventures. And yes, put a little into speculative stocks, because you just never know whether you could be on the ground floor of the next Microsoft Corp.

But in the New Economy, a great deal of the wealth that’s been created remains tied up in stock that has restrictions on when and how it can be sold. When these newly rich bring their asset portfolio to professional investors, they are much less diversified than the typical high-net-worth client. And that can cause real problems especially when sudden stock downturns render options worthless, or virtually so.

Explaining the risks

“You hope that you are managing expectations well,” Rogers said. “Up front, you have to tell (clients) the risk of having wealth concentrated in a single stock because it’s the most volatile way to invest.”

Rogers and other high-net-worth money managers say the recent fluctuations haven’t had too much impact on their older, established clients, whose worth is tied to several different kinds of investments. But their younger, newly rich clientele may have a different perspective, because they have only recently become wealthy and are unsure how to best protect themselves.

“The most concerned clients are the newest ones who just got wealthy recently,” said Todd Morgan, chairman of high-net-worth management firm Bel Air Investment Advisors. “People who’ve been wealthy (for a longer time) usually have more realistic expectations.”

One prospective client is a 32-year-old Texas entrepreneur who’s just sold his business for millions and is flying in with his wife for advice.

“What he said was, ‘I’ve gotta make sure I keep this,'” Morgan said. “We have to work on his sleep-well quotient.”

Giving sound advice is great, but sometimes there is resistance. Some people made newly rich from the Internet boom are convinced they know more than a staid banker does about how the Web is going to revolutionize the global economy.

Even if they entrust their money to a professional, newly rich clients may not be as acquiescent in taking advice. Given the remarkable run upward in stocks over the past decade, many young, tech-oriented wealthy have only recently been exposed to the reality that what goes up also comes down.

“One of the things I tell people to think about is, at what point do you feel comfortable with losing it all?” said J.R. Mathena, who counsels the affluent for Scudder Kemper Investments. “If you’re 24 and made a mint, and you lose it all in two years, you’ll be 26. But if you’re in your 40s, it’s a bit different. You almost have to look at it from a psychological point of view and make people understand how things change and be concerned about what might happen.”

Too much information

Further complicating the job of managing neophytes’ wealth has been the rise of the financial news networks. These days, earnings results, the Nasdaq’s movements and the often inscrutable comments of Federal Reserve Board Chairman Alan Greenspan are reported with the same tone that used to be reserved for sports announcers describing a pennant race.

And those breathless pronouncements are transmitted instantly around the globe via real-time financial news Web sites and in chat rooms. As a result, it can be hard to soothe the nerves of wealthy clients who are sure they are as up-to-date as the investment professionals.

“CNBC can make you feel very bullish during a (stock market) rally and very nervous during a decline,” Morgan said. “People continue to believe that performance should be judged by the time the planet Earth revolves around the sun. People now think, ‘Jesus, the market’s gone down by so much, blah, blah, blah.’ But what about the last five years?”

As a result, sometimes during a crisis a money manager has to do more than hold hands and give soothing advice. Sometimes a more dramatic expression of confidence is necessary.

Morgan remembers a call two years ago, during the height of the Asian financial crisis, when bourses worldwide were faltering and investors were worried that a global selloff was imminent. One very wealthy client panicked.

“He said, ‘I can’t sleep, I really think we should get out (of the stock market),'” Morgan recalled. “I said, ‘Take a deep breath, and take a walk around the block, and when you come back, add another $5 million.’ He didn’t add the $5 million, but he didn’t get out (of the market) either. And he’s glad he didn’t.”

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