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Millionaires, But Middle Class

Who are the hidden affluent today and how they are influencing the market?

March 20, 2008
by Lewis Schiff and Russ Alan Prince

CPAs and other savvy financial advisors who are eager to get a sense of the future needs of their clients should take a closer look at what is happening today in the affluent market. A growing number of households headed by the "working wealthy" act as tastemakers for the rest of the middle-class. If they like a product or service, not only do these early adopters help sellers gauge future demand for their wares, but the middle-class affluent act as advocates for those products and services, telling family, friends and colleagues about these innovative and sometimes revolutionary ideas.

In the course of doing survey research for our new book, The Middle-Class Millionaire: The Rise of the New Rich and How They Are Changing America, we found that the people we call Middle-Class Millionaires — the 8.4 million households in America with $1 million to $10 million in net worth — are setting the pace for innovation in new and fascinating ways. While the word "millionaire" may conjure up images of jet set lifestyles and financial peace-of-mind, our original research discovered that Middle-Class Millionaires work exceptionally long hours to maintain their expensive lifestyles and most think of themselves as just plain "middle-class."

Who Are Middle-Class Millionaires?

Middle-Class Millionaires vet the market for goods and services that respond to common middle-class tastes in areas such as family safety, health, self-improvement and the environment (although luxury and financial markets respond to their influence, as well). We discovered middle-class millionaires testing out potentially transformational ideas at the high-end of offerings in finance, medicine, education, real estate, transportation, travel and other major industries.

Though the working wealthy share many of their values with the rest of the middle-class, they exhibit several traits that clearly set them apart.

For example, the working wealthy consider themselves to be influential in their communities to a much greater extent than the rest of the middle-class. They are 50 percent more likely to say that they "tell lots of other people about products or services they like" than the middle-class survey respondents. They also report that "they are regularly asked for advice on what to buy" five times more often than the middle-class survey respondents. We dub this phenomenon — in which the middle-class millionaires' spending habits are watched and emulated by others around them — the "Influence of Affluence."

Growing Influence of Middle-Class Millionaires

Take, for example, the growth of OnStar, the automotive tracking and communication system offered by General Motors (GM). It was introduced in 1996 as an option only in GM's highest-end production vehicles, including the Cadillac, as a luxury accessory. But its appeal as a safety feature that provided drivers with 24-hour access to roadside assistance and emergency calls was so profound that OnStar eventually became standard equipment on all American-made GM vehicles. Industry analysts say it is just a matter of time before such systems are standard equipment on all cars.

The auto industry is having another "Influence of Affluence" moment right now. In Silicon Valley, an electric car — a sporty roadster designed by Lotus — is readying to be delivered by its manufacturer, Tesla, to its first 100 owners. At $98,000, buyers include the super-rich such as George Clooney and the founders of Google, but they also include a number of ordinary Middle-Class Millionaires. Their enthusiasm for the Roadster reflects the middle-class' increasing concern about the environment coupled with their affection for powerful cars. The Roadster goes from zero to 60 mph in about four seconds — faster than a Porsche — and can go about 200 miles on a single charge. A Popular Mechanics magazine writer who road-tested the vehicle wrote, "who knew saving the planet could be this much fun?"

According to Tesla, the Roadster will eventually be followed by a luxury sedan in the $55,000 price range and a $30,000 model after that. A Tesla executive told a Senate Finance Committee panel in 2007 that "our strategy is to enter at the high end of the market, where customers are prepared to pay a premium and then move down market as quickly as possible to higher production levels and lower prices with each successive model." By leveraging the Influence of Affluence, Tesla has managed to create a cult following before the first car has rolled off the assembly line.

This kind of scaling-down process isn't entirely new. The late Nobel-Prize-winning economist, Milton Friedman, once observed how thanks to early adopters, innovation is a process by which, "the rich work for the poor." But we found in our survey that middle-class millionaires add much more to the mix. When they are among the first people to try out a new product or service, they are much more likely to talk it up, and their initial judgment carries a lot of weight with the rest of the middle-class.

Based on our survey of over 3,700 households, about half of our middle-class millionaire sample report, they are "very or extremely often asked for advice" about "investment advisors to use" (70.5% vs. 2.6% for the middle-class survey respondents); "how to handle personal finances" (45.6% vs. 11.9% for the middle-class survey respondents); and "tax preparers and tax advice" (14.3% vs. 3.3% for the middle-class survey respondents). Across 30 areas of life, ranging from cars to careers to caring for elderly parents, they report being asked for advice at least twice as often as the middle-class survey respondents.

We found the Influence of Affluence at work in medicine, where the nation's foremost proponent of pricey concierge physician services believes that his business model could revolutionize preventive health care for all Americans. In education, a private college admissions counseling firm that charges $300perhour has leveraged its expertise to launch a mass market offering of Web-based admissions tools and online counseling. In Florida, following the destructive 2004 hurricane season, costly home generators are being transformed from a luxury item to a perceived necessity, largely thanks to the influence of middle-class millionaires.

In Summary

CPAs should heed demographic projections suggesting that middle-class millionaire households are growing at a rate of about 15 percent per year. The only population segment that's growing faster is the "about-to-be-millionaire" families with net worth between $500,000 and $1 million, which are growing at a rate of 23 percent annually. All told, the next decade could see between 15 million and 20 million middle-class millionaire households in the U.S. A population of that size, with one foot in the world of the middle-class and the other in the world of the very rich, represent a force for influencing innovation beyond anything even Milton Friedman could have imagined.

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Lewis Schiff is a senior managing principal for Advanced Planning Group, where he leads a team of private wealth experts who specialize in the needs of high-net-worth clients globally. His forthcoming book, The Middle-Class Millionaire can be pre-ordered at Amazon.com, Barnes & Noble and DoubleDay.