Millionaire ranks hit all-time high

The number of millionaires in the U.S. increased to a record last year, boosted by gains in stocks and global financial markets, according to two new studies.

The number of U.S. households with a net worth of $1 million or more rose 21 percent in 2004, according to a survey released Tuesday by Spectrem Group, a wealth-research firm in Chicago. It is the largest increase since 1998, according to the study, which was based on data from more than 450 qualified respondents. There now are 7.5 million millionaire households in the U.S., breaking the record set in 1999 of 7.1 million. The study excluded the value of primary residences, but included second homes and other real estate.

A separate study, also released Tuesday, by Boston Consulting Group found that the U.S. continues to lead the world in creating new millionaires. The number of households in the U.S. with liquid assets of $20 million or more is increasing by 3,000 households a year.

The studies suggest that despite falling wages for nonmanagement employees in 2004, the fortunes of those at the top continued to rise. Unlike many wage earners, the wealthy rely on investments for much of their increasing wealth. They also tend to invest in higher-risk and potentially faster-growing investments, including hedge funds, private-equity funds and debt instruments.

The findings mark the second straight year of growth for millionaires in the U.S. After rising rapidly in the late 1990s, the fortunes of the wealthy tumbled with the bear market of 2001 and 2002. Last year, however, with the economy expanding and stocks recovering, the wealthy staged a comeback.

The surveys also show that despite growing pessimism among wealthy investors about the outlook for the economy, the rich continue to increase in both numbers and in wealth.

“People’s attitudes toward the economy are so negative, but the reality is that the affluent are bouncing back to where they were before the bear market,” says Catherine McBreen, managing director of Spectrem.

Economists question, though, whether the wealth boom will continue in 2005. Stock markets have swung wildly this year, and many are predicting slower growth — and potentially even losses — in hedge funds.

Reflecting their doubts about the future of the financial markets and the economy, the affluent continue to hold large amounts of cash. The Spectrem survey showed that 9 percent of their assets were in cash deposits.

Households with net worth of $3 million or more garnered 34 percent of their wealth last year from investment gains, according to the Spectrem survey. Only 31 percent of their wealth last year came from compensation. The remainder came from privately owned businesses, inheritances and other sources.

Those at the very top of the wealth ladder did the best in 2004. According to the Spectrem survey, the number of households with a net worth of $5 million or more rose 38 percent to 740,000. That is up from 480,000 in 2001 and more than triple the level in 1997.

The amount of money held by the wealthy also surged. Millionaire households in the U.S. controlled more than $11 trillion in assets in 2004, up more than 8 percent from 2003, according to the Boston Consulting Group.

The wealthy remain highly skeptical of financial advisers, given their stock-market losses in 2001 and the wave of scandals on Wall Street. Fully 30 percent of affluent investors make most of their financial decisions without the help of a professional — an increase from past years, according to the Spectrem survey. Only 10 percent let their advisers make all the decisions.

Specifically, stronger financial markets and higher real-estate values helped drive the growth in 2004. Wealthy investors continue to keep most of their assets in more-liquid investments. In 2004, investors with total assets of more than $500,000 had 46 percent of their holdings in investible assets, such as stocks and bonds. Of the remainder, they held 21 percent in privately held businesses, 6 percent in insurance and annuities, 10 percent in their primary residence, 7 percent in other real estate, including second homes, and 10 percent in retirement plans.

The richest investors kept more of their wealth in investments, as opposed to hard assets. Investors with total assets of more than $3 million had 49 percent of their holdings in investible assets. Investors with from $500,000 to $1 million had 29 percent in investible assets.

Last year, the wealthy invested mostly in stocks, bonds and managed accounts. Of the total assets held by investors with $500,000 or more, 24 percent was in stocks and bonds and 23 percent was in managed accounts. The survey said 9 percent of the assets were in alternative investments such as hedge funds and private-equity funds, with 13 percent in mutual funds. Employer equity participation, such as options and restricted stock, accounted for 7 percent of their holdings.

Europe also showed growth in affluent households and millionaires, according to the Boston Consulting Group study. Europeans with more than the equivalent of $100,000 in investible assets rose 4 percent. The number of households with more than $20 million in investible assets in Germany rose by 1,000 a year in 2004.