Are you wealthy?

Well, tell the truth... are you wealthy... truly wealthy? Really? By what criteria? Sure, if you are a Billionaire or even worth a mere $100 million, most people would agree that you are clearly wealthy. Back in August I wrote a blog post entitled "Who wants to be a millionaire?" that being even a millionaire did not qualify you as being rich or wealthy. I argued that even a net worth of $5 million or $10 million, or even $20 million was not enough to rate up as being wealthy enough to retire and comfortably live a life of leisure for the rest of your life without worrying about the economy, interest rates, inflation, or even pay the slightest attention to anything that goes on on Wall Street. I argued that $50 million is "the "gold standard" that we should use for being "rich" these days. Anything less and you are skating on thin ice."

I also added this key caveat:

And remember, that is $50 million in liquid wealth such as Treasuries and high-quality dividend-paying stocks or stable income-producing real estate. You should not count any speculative investments (e.g., hot Internet stocks, venture investments, real estate speculation, etc.) when calculating your "wealth."

I wrote that on August 5, 2007, a short while before almost everything hit the fan. I did not even know about these things called auction-rate securities (ARS), but I did know that liquidity is a timeless value.

I added another caveat:

I wouldn't say that you are "rich" unless you are sustainably rich for the rest of your life and will be able to pass on the bulk of that wealth (even adjusting for inflation) to your heirs. So, financing your standard of living by selling capital, thus reducing your wealth also doesn't count as being "rich."

That was a significant part of my calculation that $50 million is the low end of being considered wealthy.

I did neglect a third caveat: You need to earn enough income off of your investments to be able to hire an absolute top-tier money management expert/guru to do a quarterly assessment and tune-up of your investments. You are not truly wealthy if you have to "manage" your money by yourself. And you are not going to stay wealthy unless you can hire talent that is better than that available to 95% of the typical savvy investors. Your typical stock broker or "financial adviser" or "wealth manager" simply does not have access to the kind of industry intelligence needed to stay ahead of all of the shenanigans played by the "professional" denizens of Wall Street on the good citizens of Main Street. Yes, most of the big financial institutions do have top-drawer talent, but usually it is reserved for top-drawer clients and not for mere millionaires.

In truth, with enough money you actually can get by with simply the coupon payments from Treasuries, but that is probably leaving too much money on the table. OTOH, given the problems that most of the major Wall Street "institutions" have encountered, Treasuries are in fact a great route to go, assuming that you really are able to meet my wealth bar of $50 million. But what if you do not have $50 million and have a mere $15 million or less than $10 million? In short: You are screwed.

If you have merely $100,000 or even $200,000 or $400,000 in mutual funds and money market funds, you are actually in quite a safe position despite all of the market volatility. You are safe because law and regulations provide you with some amount of protection. Sure, you do not have access to hedge funds and fancy derivatives and "investments" with alluring names such as "action-rate securities." Sure, you are deprived of access to these fancy financial instruments that promise higher rates of return, but you are protected from the unregulated and under-regulated excess risks of these "investments."

[Memo to myself: Find out what "wealth" threshold or other criteria were typically used by most brokerage firms to decide whether to promote auction-rate securities to clients. I have heard that ARS were available for as little as $25,000, but I do not know if they were peddled to clients with total net worth that low. Maybe some readers might have the answer.]

If you are worth $50 million (or maybe just $25 million), the big financial institutions will actually give you access to (some of) the best investment intelligence available. And that is only if you do not buy even better investment intelligence using a small fraction of the income from your wealth. Either way, you have the wherewithal to be treated as a top client deserving of special and privileged attention by the firm's best talent.

BUT, if you don't meet that true wealth bar and have merely enough to legally be considered a "high net worth individual" ($1 million or more), you become the unfortunate target of opportunistic brokers and corporate Wall Street securities sales "strategies." You do not have enough money to merit better treatment, but the simple fact is that now your broker is given carte blanche license to expose you to "investments" which do not have the various strict protections that are mandated for truly "little" investors.

Another factor with risk here is that most professionals know that it is dead wrong to chase yield. If you have cash to park for a relatively short period of time, professionals know to put it in the least risky asset available, such as T-bills or normal money market funds. A lot of ARS investors literally asked for trouble by seeking and even demanding a little bit more yield. Sure, in some cases brokers either pushed or at least enticed clients to go for higher yield, but the truth is that probably very few of those clients took the time or trouble to read the fine print and question how a long-term bond fund could possibly be as liquid as a basic money market fund. In other words, clients valued a modestly higher yield over doing even a little homework. No responsible adult should be permitted to claim that trusting a salesman is an acceptable defense for doing something stupid. The problem is that people need financial advice, but brokers and even "financial advisers" are still primarily a sales function or at least a sales channel. Never look to sales for advice.

The point is that a truly wealthy individual simply would not care about that modestly higher yield. The truly wealthy individual simply values one thing: their time and a desire to invest in a manner that requires less work and less homework on their part. A truly wealthy individual knows from experience that taking excessive risk typically means acquiring headaches that interfere with enjoying wealth.

That is not to say that a money manager for a truly wealthy individual is not going to take risks and would not have put money into auction-rate securities or subprime mortgages, but it is to say that a manager of $50 million is more likely to do the kinds of due diligence and risk assessment and diversification so that any mistakes and bad investments are more likely to get lost in the noise and less likely to become headaches for the truly wealthy individual.

If you have a net worth north of $50 million and you are running into headaches like ARS and subprime mortgages, then what you really need to do is step back and start acting your wealth. Hire a great money manager, not to trade stocks and futures all day and to get you that last 10 basis points of yield, but simply to focus once a quarter on deep risk assessment and asset allocation.

The reason I write this post now is that I read in a column in Bloomberg by Joe Mysak entitled "High Net Worth Takes On New Meaning in Auction Mess" that my $50 million number is just about right on the money for having enough money to get the big money managers on Wall Street to "treat you right." Anything less and most of the big money managers will treat you with as much disdain as even the "little guys" who have less than $1 million in net worth. As Joe puts it:

If you have less than $10 million to invest, you can go dangle.

That seems to be what securities firms are telling clients.

... this group's real sin is that they aren't wealthy enough for Wall Street securities firms to care about them.

The ones that have e-mailed me all seem to have anywhere between $50,000 and several million dollars' worth of auction- rate securities, either the bonds or the preferred shares sold by closed-end funds.

That's not enough. I don't know where the new line of demarcation exists -- maybe it's $10 million, maybe it's $20 million. There are firms that don't even want to know you unless you walk in the door with $25 million or $50 million.

...

Those are the people the big firms care about, and cater to, and you don't hear any complaints from them about being stuck with auction-rate securities, do you? I suspect that if you have $25 million at one of these outfits, you either wouldn't have been sold this stuff, or your broker or "wealth manager" would have taken care of your problem.

And I find it difficult to believe that if you had, say, $50 million at a firm they would tell you the value of your auction-rate securities was all of a sudden 5 percent lower because, guess what, you can't sell them. UBS did that on March 28, even announcing that this was "the right thing to do" and "in the best interest of our clients."

Say you have $250,000 saved up from a lifetime of toil, or maybe you inherited $2 million, or perhaps you struck it rich on "Antiques Roadshow," and now have a cool $4 million.

You know what? Keep it. Put it in your mattress. Securities firms, for all their touchy-feely advertising, don't want to know you. They can't make enough from you to justify the expense of an account manager. That seems to be the reason they can afford to alienate the thousands of investors who hold these auction-rate securities.

That seems to be the true bottom line for money managers and clients with only a modest degree of "wealth": They can't make enough from you to justify the expense of an account manager.

Back to the title of this post, I would say that you are not truly wealthy unless you can justify the expense of a great money manager and both he and you are extremely comfortable with a fairly mediocre rate of return because your common goal is extremely low risk to your principal.

To wit, even though ARS were billed as "good as cash", you need the kind of money management talent which would have been able to detect within 30 seconds that such a claim was as dubious as the FASB determined to be the case over a year ago. In fact, your money manager probably would have already known about the FASB change if not actually been one of the professionals lobbying for such a change to begin with.

Remember: You get what you pay for. One way of paying for lower risk is to accept lower yield. One way of paying for higher yield is acceptance of the risk for occasional disruption of access to your principal. You can decide for yourself which way you would prefer to pay. You are truly wealthy if you can: 1) hire a great money manager, 2) instruct him to reduce risk to an extremely low level, and 3) accept the lower rate of return that your manager produces.

-- Jack Krupansky