Three Common Qualities of High Net Worth Individual’s Balance Sheets

Three Common Qualities of High Net Worth Individual’s Balance Sheets

I recently wrote that it doesn’t matter whether you make $46,000 a year or $460,000 the basics of personal finance are always the same, and one of my readers/fellow blogger, Investor Junkie, made a comment,

@Evan: It would be great if you could write a few blog posts on your observations you’ve had working with high net worth clients. What got them there and with you think is different with them than say the average joe.

Right off the bat, I am going to tell you that I have no idea what got them there, for that I would defer to studies and books that are done on the subject.  I do not deal directly with high net worth clients.  The Financial Planners in the office find, build and cultivate the relationships.  So my experience is not really like that of Thomas J. Stanley author of, The Millionaire Next Door.  My role is more brain storming and putting together documents and calculations.

So basically I see almost every balance sheet that may have significant net worth which goes through my office, and then I prepare materials for the planners’ second meeting and beyond.  So when Investor Junkie asked me that question I started to thinking about some similarities I often see.

Similarities of High Net Worth Clients

As you could imagine the balance sheets are very different from family to family, but there are a few similarities that I see.  It is irrelevant if you agree with that particular attribute – it is what I see.  I am going to try and not opine on the various attributes.

The House is almost always Paid off

Prepaying your mortgage is always a hot topic on Personal Finance Blogs.  Everyone once in a while one of the big players in the field will put a post and it will garner tons of comments.  The comments are usually heated and go both ways about how the move is stupid and then invariably someone will say, its a great move.  Regardless of how you feel, most of the high net worth clients’ balance sheet that I see will have either a paid off house, or one with a very low debt to equity ratio.

Side note: Nickel from FiveCentNickel just paid of his mortgage. Congrats.

They Almost Always Own a Business

Almost every high net worth client’s balance sheet has a business on it.  The types of businesses range from the mundane, lawyer who owns their practice, to beyond what I could have imagined as a viable business.  Recently, a balance sheet came across my desk and the guy’s  business was buying and selling a certain type of wire.  Even after being explained the business three times, I still couldn’t understand how this business was worth well north of $10,000,000.

They Almost Always have Investment/Financial Advisors

Almost every single high net worth client/prospect is not hands on when it comes to their own investments.  Some are more active than others when it comes to asset allocation, but for the most part unless they are in the money business (fund managers, hedge fund execs, etc.) they just don’t deal with it.

I never really understood why its so easy for PF Bloggers to dismiss the usefulness of a financial advisor or investment advisor.  Just because that particular blogger can understand asset allocation, doesn’t mean the average person can, or even a high net worth client who doesn’t want to deal with it.  Also, there are some intangibles such as talking the client down from the ledge when the market falls 30% in 2 months.

Do you disagree with these attributes in terms of their effectiveness? Anyone else in the business?

56 Responses to Three Common Qualities of High Net Worth Individual’s Balance Sheets

  1. Dammit, Evan.
    I just spilled my coffee all over my papers reaching over to comment for your post.

    That being said, those are some really interesting traits of the high net worth individuals that you work with.

    The first thing that came into my mind when you mentioned that they had their own business and use investment advisers is that these individuals probably recognize what their expertise is, “their business”, and what they don’t understand as well, “personal finance”. Since they’re able to recognize this, they can see the value of an investment adviser instead of just balking at the idea of paying someone for financial advice.

    I find that the most intelligent people that I know are quick to admit that they don’t understand something while the people that are full of crap are the ones with an answer for everything.

    Nice article!

    • SPILLING COFFEE ON YOUR DESK IS THE WORST! You can never get it fully cleaned and when you lift your keyboard there is a little puddle. I am sorry man, I say you boycott my site for at least a week LOL.

      Socrates (pronounced, So-Crates – reference? Anyone?) said,

      “True wisdom comes to each of us when we realize how little we understand about life, ourselves and the world around us.”

      and/or

      “I know that I know nothing”

      • Great quote! My undergraduate Macro Economics instructor told us on the first day of class her goal was to make us understand how little we knew about economics. Her pet peeve was know-it-alls who had never taken an economics course but had all the answers to how to fix the economy.

  2. This was an awesome article. It makes perfect sense the high net worth individuals have financial advisors. I can do some auto repair and am perfectly capable of brushing and flossing my own teeth, but I still have a mechanic give my car routine maintenance and I go to the dentist for a regular checkup and cleaning. Why would you handle your finances any differently?

      • I think we could take this a step further and take a poll to see what characteristics ASPIRING HNWI possess.

        Ever read a Ben Mezrich book? It isn’t just about the money – its the challenge, the thrill, the competition, proving yourself, making yourself a living legend…

      • I’m for financial education. At least understand what’s going on.

        Heck you could even look at it this way.. Like running a business more than likely you start off doing everything. When you get bigger you0 offload tasks to others. Be it hiring someone or outsourcing. Financial Adviser should be no different. So at first you get to understand how basic finance works and then higher someone (that should be) better than you are.

  3. I want to try and take your 3 qualities a step further and REALLY highlight the difference with HNWIs.

    From what you’ve said, it would appear the underlying theme is that HNWIs focus on BUSINESS. Their businesses are the most important component to their worth.

    Having a home that is paid, or close to paid, would allude to them not being overtly concerned with housing as an investment. That is, they know it will add to their net worth, but again their focus is on their business.

    You mention having a financial advisor and not being hands on with their investments. Similar to above, it alludes to them not being overtly (key word) concerned with their investments as a means to wealth. So they know their net worth will grow through investments, but again go back to the focus being on their business.

  4. If you have a ton of money, it makes sense to outsource the financial advisor expertise if you made your money through another means.

    I really do enjoy reading PF sites from writers who have no idea what they are talking about. It’s fun to banter :)

    Evan, doesn’t being so close to fortunes make you want to go out and create your own fortune?

    • “I really do enjoy reading PF sites from writers who have no idea what they are talking about. It’s fun to banter”

      And there are plenty of them out there. I actually don’t talk a lot about investing here, because I do the buy and hold thing and don’t get much into anything more aggressive. I’ll tell you I LOVE reading about it though .

      “Evan, doesn’t being so close to fortunes make you want to go out and create your own fortune?”
      HENCE THE NAME OF THE BLOG!!!! Seriously though, the first 12 months or so of this blog was really about paying off debt and getting the house in order.

      • Ever a mixed bag? I had a brief exposure to some HNWI individuals through a project. These guys had $10+ mil SUMMER beach homes. I thought I knew what wealth was until I met them.

        It motivated me to do more, but got me down at times. It seemed like such an insurmountable amount of wealth – it was almost too much to comprehend.

        Thoughts?

    • :( I’m not in the “business” and offering advice? Am I on that list?

      Isn’t it all part of the learning experience? If we held “experts” the same standard, we’d wipe out 1/2 the cnbc staff.

      Ever check out Despair.com? Look at the demotivator on Economics.

      http://despair.com/economics.html

  5. I am feeling your sense of urgency! Nice! Responded to your question on the relevance in my latest post. It’s 100% relevant. I think I have found the CURE for personal financial ruin!

    Regarding PF sites, the best is when I read about those offering investment advice who aren’t in the investment business, or buying a home, when they rent. Those posts are extremely entertaining to me!

  6. As a former tax preparer and also as the owner of 4 different businesses I can definitely agree with your observations. As for the mortgage issue I recently submitted a guest post to Wise Bread titled, “Why I Could Have Paid Off My Mortgage in Full at the Age of 27 but Didn’t” so hopefully that gets approved and makes it on to the site sometime soon :)

  7. This is what I was looking for Evan. Thanks!

    I agree with the financial adviser part. My only issue is this:
    - Many financial advisers aren’t that good. Maybe it’s at the level of NW I’m at and the ones I’ve talked to or had. It’s not easy to find a good one.
    - I believe you should be at least educated enough to understand what’s going on and what/why they recommend something. I currently do my own money mgt, but maybe because I’m not a HNW person. In the end no one cares more about your money than you do!

    At least I can more relate to having a great accountant (also someone you must have in your pool of advisers).

    While I don’t do my taxes, I do understand what’s going on and at least ask questions. Since in the end my name and company are in the end responsible for it.

  8. A friend of mine in financial planning for wealthy tells me they keep lifestyle simple and invest a big percentage of their income…20-30% or more. They make sure thier money is working hard for them.

    • I think this is the most important point. People do not get rich due to their passive investments; good investing is just prudent money MGMT to preserve the purchasing power of what you have. Even hedge fund managers get rich because of their business of managing money (their fees), which is vastly more lucrative than just the returns from their money in their fund.

  9. @ Evan & David & Sam: I’ve got a new idea on outsourcing I’ll hopefully be posting within the week. Start thinking teeter-tooter.

    @ IJ: Working on neat little investing trick, think you’d be good to QC the logic when I post?

  10. I think that is interesting that most of them either have their house paid off. My husband wants to do the exact opposite. Says if we won the lottery that he would keep the mortgage. Hmm…

    And the wire business… if the guy is selling copperwire, he can make a killing. Don’t you ever hear about the people stealing the copperwire from the stop lights to resell. Going for top dollar. ;)

    Time to start a business.

    • I am not passing judgment, yet, I just know that most of the balance sheets I see has a paid off house.

      I have never heard of the stealing of copperwire from stop lights, but I guess it would make sense in an illegal sort of way.

  11. Aren’t these 3 characteristics really a result of being a HNWI? ie. if I had $5 mil as opposed to $5k in the bank, I’d be more likely to have paid off my mortgage with the extra cash and hire an expert to handle my finances – because after their fee, i’d still be left with a humongous amount of cash, whereas after you take out the fee from the 5k, you’re going to be that much poorer. I agree with the owning the business part – you can rarely aspire to be a HNWI individual with a 9-5.

    • It would all depend in what order they lived their life. Maybe they put everything into their house and then reinvested the mortgage payment they had into a business.

      OR

      Maybe they had an investment advisor that got them 8% net returns and they used that to pay off their house.

      I don’t know them well enough beyond pieces of paper to understand how they did it.

    • I don’t know if I’d like to give it a Hard number because it WILL make it unattainable and out of reach for most readers, and at the same time make myself depressed on how far I am from that number.

      • Eh. I assume most have started from zilch, zero, nada?

        At least wikipedia considers them above 1 mil.

        http://en.wikipedia.org/wiki/High_net_worth_individual

        That at least should be attainable by most people in their lifetime.

        Maybe you are referring to Ultra High Net Worth 30 mil+?

        Ok again according to wikipedia over 95k people are above 30 mil. How many clients do you know have that?

        The focus by everyone should be the one’s who started from nada, not from inheritance.

        You may not reach 30 mil (hell I’m not sure either) but you will at least live better than most, per my Financial Samurai post.

  12. Evan – Sorry to stain your post with a million comments!

    My outsourcing “rebuttal” to David’s post is up. Hope all you aspiring HWNI enjoy it!

  13. Hey don’t forget about the wife as an asset! :)

    I did see your articles on the Swiss letters…intrigued, will check out this weekend.

  14. I think having your personal debt and mortgage paid off gives you more confidence and means to be adventurous and take some intelligent calculated risk for profit…

    At least that’s what I’m hoping… :)

  15. Both individuals and money managers underperform the indices, on average. It’s unlikely that these high HNWIs are extremely skilled at selecting money managers (not including tax managers). So most of their money probably came from profits in their own business.

  16. Does the fact that that are ‘clients’ change the overall sample?

    The folks who do their own investing would not even be on your radar.

    I run an investment club, have lots of friends with HNW (who put up with my frugal discourse mainly because I am wealthier than they are and I rub it in their face when we talk money) and what I find is that active management, if sung by the right siren, can be almost irresistible. The fear of ‘looking like a fool’ is more than enough to drive them to a broker. It is actually less about the money and more about the status. When I mentioned my Vanguard Admiral shares because of the low costs, the response was more slanted toward the high cost of entry ($100,000 minimum) as if it were some exclusive club. Rich people can be dicks. I’m one of them and I make it point to highlight when my peers act in a dick way.

    Case in point, I recently had an executive meeting where we were short 5 attendees (because of the Icelandic Volcano). I made it a public point to gather the extra catering and bring it to the mailroom. I have to admit that this was spawned by a single prima donna who wanted the ‘staff’ to practically wipe his arse but I see this all the time.

    I rolled up my sleeves, loosened my tie and gathered a bunch of sandwiches and goodies on a single china tray and announced my intention.

    I alienated a few execs but made friends with a few folks who *really* get the job done day in and day out.

    Here is the kicker. Most people at the top are ethical, moral and really great human beings. It’s the ones 2 layers down who hold a disproportionate amount of evil in their blood. The quest for power can take its toll on even the most worthy.

    In my experience, High net worth folks do own their homes and run a business but they tend to be more hands on with a bulk of their net worth. They have a CPA and a Tax Lawyer as consultants, not as dignitaries.

    just my $0.02

    -WR

    • We have clients that we do none of their investing. My firm also handles estate planning, gift planning, and insurance planning. So even if we weren’t going to do their investments they still might show up on the radar. We aren’t just an investment house. Actually, we just finished up a client worth mid 8 figures who does all his own investing (he is actually a fund manager).

      “In my experience, High net worth folks do own their homes and run a business but they tend to be more hands on with a bulk of their net worth. They have a CPA and a Tax Lawyer as consultants, not as dignitaries.”

      I like that sentiment. Makes sense. It tends to trail off if the HNW individual is 2nd or 3rd generation at least in my little world.

  17. My experience is somewhat anecdotal. I realize that the HNW people I know have to be more than a little odd to be willing to socialize with me in the first place.

    I do vaguely recall a great quote on the subject of heirs.

    “The grail of wealth is rarely passed along to succeeding generations without spilling most of it’s contents.” not sure where I heard it.

    The idea being that the discipline, drive and work ethic it takes accumulate and protect great wealth needs to be instilled in your heirs long before they get a hold of the money.

    To be fair I see both. The spoiled kids of the rich who are on a fast track to squander their inheritance before they even get it and the more disciplined. I think the parents overall relationship with money and power influences this quite a bit. On more than one occasion their disdain for the parents love of money& power over almost all else was mentioned.

    I have heard it mentioned elsewhere that really poor people should not have kids if they can’t take care of them, I would also argue that really rich people should not have kids if they *won’t* take care of them.

    The original points of Having their house paid off, owning a business are absolutely accurate. We’ll have to call it a draw on the investing thing. One thing to keep in mind is that there are a few cases where a persons wealth is almost completely tied up in the assets of his/her business, which they watch very closely.

    -WR

    btw- Great article and great site.

  18. The basics of how to get there if you don’t own your own business for me have been:
    *Get a college degree and no it doesn’t have to be a costly prestigious one – if you are a parent and can afford it, pay for your child’s education – it’s the gift that keeps on giving
    *Find a field with opportunity for advancement – I chose sales – I currently work for a cpg company calling on a large retailer – the pay in this career can rival the small town doctor, lawyer and cpa without the large college price tag (not to mention the late start in saving due to attending college for more years)
    *Start out with little to no debt if possible – DON’T let kids run up credit cards and get used to living above their means – it sets them up to never be HNW
    *Pay yourself first – Start a Thrift or IRA IMMEDIATELY and contribute the max % of your salary allowed. (As an added benefit you don’t give as much to Uncle Sam)
    *Save that same % (or more if possible) in outside investments – I’ve always liked Vanguard index funds
    *Buy Medical, Home and Car Insurnace because it will rain…
    *Never live above your means and don’t hang out with people who do – it’s a recipe for never being HNW – you can enjoy life without spending large wads of cash – reading and conversation are both free
    *Marry smartly – if financial freedom and HNW are your goals do NOT marry someone who does not think the same way
    *If you can save diligently for the first 20 years of your career then compound interest will help to take care of the rest
    *No you do not need a financial planner: no debt, time, discipline and automatic investing in good no-load diversified index funds CAN get you there, but you do need to keep a portion of your savings in cash for emergencies – 6 mon salary or 10% of your total net worth – whichever is larger – helps with peace of mind
    *Do not follow the market daily – it will only make you crazy and lead to stupid decisions – no offence, but Jim Kramer is a crackpot – I look at my net worth quarterly and then rack it up – along with my spending – in April annually (heh you have to do your taxes anyway) so I can see how I’m performing year over year – this allows me to “re-purpose” and “re-energize” myself to stay on track
    *Provide food, shelter, clothing,and love to your children – my parents bought nice, but reasonable presents for birthdays and Christmas – none in between – when I moved out at 20 they gave me $2K and haven’t provided economic outpatient care since
    *I’ve always liked the saying “Nothing tastes as good as thin feels” The same thing can be applied to money “Nothing purchased feels as good as HNW”

    Having provided this long soliloquy, I’ll have to say I have been blessed with a good paying, steady job, that provides opportunities for advancement and a like minded marriage partner. Thus far, being lucky enough to not have hit some of the uglier bumps in life’s road, has also been a great boon in paving the way to HNW. I wish everyone else that same luck!

  19. I am a HNW individual and I can safely state that one should never trust anyone with one’s health and almost never trust anyone with their money.

    • Thank you for checking out my site!

      What do you mean by the health comment? So do you handle everything to do with your money? No advisors

  20. Hi Evan,

    I’m a little late to the party on this one, but I love the post. I recently left my father’s fixed income investment management practice (to preserve our relationship¦working with family can go either way I’ve learned!), which caters exclusively to HNW clients. The avg account size would probably be around $6-8mm and from what I know, nearly all of our clients are either financial services pros themselves, or have been wildly successful business executives for the majority of their careers. One thing they all have in common is that they are conservative investors (though I’d bet they were far more risk-loving when building their wealth). A lot of wealth was acquired through real estate, though I don’t know if having the property “paid off” is as relevant if you’re still living in it. Because we only manage their fixed income investments, I don’t have too much insight into their personal balance sheets. But anecdotally, all of our clients find their way to us because of the market execution that we offer…which is the largest single hurdle for individual investors (whether you have a FA or not). Having recently looked into becoming a FA at a major retail brokerage, I determined I wasn’t willing to send my clients through the ringer if I joined the program. FAs make their money by generating fees and new business…there is a premium on closing new business and the more transactions, the better (and if you don’t meet specific hurdles, you get the axe). As a result, too many individual investors are sold products that aren’t suited for them (they carry far more risk than is appropriate) and even if they are sold a good security (like a good municipal bond), there are so many dealer and broker’s broker markups that the client is getting hosed on the price. Because we execute trades on behalf of our clients in the inter-dealer market, our clients’ transaction fees are minimized; because we collect a small annual management fee of total assets, we don’t have an incentive to run up transaction fees; and because we don’t have any product to sell, we only pick securities that are in the clients’ best interest. But this is extremely rare to find in an advisor. This is the single reason why our clients come to us (we even have accounts for executives who are still working in the highest ranks of the financial services industry) and why understanding the way the FA game is played is critical. (Case in point: In a recent FA interview, I was judged more on my ability to meet fee hurdles than on my ability to make prudent decisions on behalf of my clients).

    As an aside, I believe that my parents rent their apartment and have a mortgage on their summer house. So I don’t think there’s much of a correlation in that regard. But ownership of a profitable business is clearly a predictor of becoming a HNWI.

    • Never too late to join this party! This was one of my favorite posts ever.

      I don’t agree with you about FAs, but maybe that is because I am in “The Biz” although in a different role.

      Nevertheless you could always become a Fee Based FA. Then you have none of the worries that you stated.

  21. I am a Very High Net Worth Individual.
    My traits: Early childhood lower middle class. Young Tom Edison was my theme movie. I wanted to be an inventor.
    I made gun powder when I was 7 years old. I tried to invent a new acid out of Potassium Hypochlorate & was burned in the process.
    I still have the scar on my knee to prove it! I built a laser when I was 10 & an analog computer at 11.
    My Dad left when I was 10. Needed to get a paper route to help support the family.
    I always worked. I wanted more. I wanted what Thomas Edison had.
    Algebra in 4th grade. Calculus by 8th.
    Flunked out of high school.
    Who are YOU to test ME on higher level mathematics?
    I always gave the answer with NO supporting work. FAILED!
    ME FAIL? No Way! I asked the teacher to give me the hardest equation in her book & I will solve it instantly. I did & she said that that’s not the way it works. You must provide proof of your answer. Oh, so I’m cheating somehow.
    Ridiculous! F you!
    I garnered many important jobs soon.
    But, I always had side jobs or inventions to work on.
    After teaching myself about computer programming, the rest is history.
    I have many U.S. patents & I retired after selling ONE brilliant idea.
    My idea bordered on OCD! I had to make it more perfect than it already was.

    You don’t have to be brilliant like me.
    You need the OCD to just DO it!

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