Time for belt-tightening, even for wealthiest

By Scott Malone

BOSTON (Reuters) - As global markets test five-year lows, advisers to the wealthiest investors are walking a fine line with their clients, counseling them that they can afford to ride out a sharp downturn, but are not so wealthy that they can ignore it.

The calls from clients with hundreds of millions of dollars in assets follow a familiar pattern, Robert Elliott, senior managing director at Bessemer Trust, told the Reuters Wealth Management Summit in Boston.

"The most basic statement is: 'I'm not sleeping well at night, and I don't care about the upside, I really want to protect my downside,'" said Elliott, whose New York firm advises clients with at least $10 million in assets.

Typically, an investor will say he wants to take 20 percent to 25 percent of his money out of the market, Elliott said.

While he tries to urge clients not to cash out of investments at a time when the major U.S. indexes are down 30 percent for the year, in the end, "It is their money," he said.

"A lot of what we do is kind of psychiatry," said Charles Lowenhaupt, chairman and chief executive of Lowenhaupt Global Advisors of St. Louis.

When a nervous client calls in -- and anxiety can be signaled by something as simple as a testy voicemail asking about the firm's mailing address -- Lowenhaupt's response is to point out that riding out a tough market need not be too disruptive to the client's way of life.

"The way to bring them down to earth is to say, 'OK, your portfolio is down 30 percent ... What is it you can't do now with your wealth that you could do a year ago?'" Lowenhaupt said. "If you've got $100 million or more, you feel a little awkward saying, 'I can't do anything I want to with my wealth.'"

LIFESTYLE RISK

The toughest conversations are with clients who live at or near the limits of their substantial means, advisers said.

"If the size of the portfolio is very substantial, tens or hundreds (of millions of dollars), maybe the question is, what is my liquidity for purposes of maintaining a lifestyle?" said Richard Kohan, national partner in charge of wealth transfer solutions at PricewaterhouseCoopers PWC.UL. "Because those funds are probably being used on a lifestyle, and if my liquidity is too low or too high, how do I know?"

While the wealth managers at the summit advise their clients against extravagance, for some a downturn will likely mean cutting back.

"We counsel people not to have too excessive a lifestyle vis-a-vis their capital, but if you're thinking that you're living rather well and suddenly the capital base diminishes, then you have two choices," said Elliott. "You can either cut back on how you're living, or you can eat into your capital. Neither is very attractive."

If trimming expenses is unattractive, it is at least growing more common, even among the wealthiest Americans, managers said.

"I've heard it from my neighbors, I've heard it from my social friends, I've heard it from clients. People are being very, very reserved about future expenses," said Timothy Vaill, chairman and chief executive of Boston Private Financial Holdings Wealth Management Group (BPFH.O: Quote, Profile, Research, Stock Buzz).  Continued...