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?
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!
Mike´s last blog ..Monthly Money Weigh-In February 2010: +$29,382 (+$3,719)
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.
David @ MBA briefs´s last blog ..Do positions of power corrupt people or attract people who are already corrupt?
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?
David @ MBA briefs´s last blog ..Do positions of power corrupt people or attract people who are already corrupt?
Yet how many bloggers out there tell you to do just that..Because the fees are too high?
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.
Investor Junkie´s last blog ..How Much is 1% Costing You?
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.
FinEngr´s last blog ..What’s Wrong With “Green”
If I knew the clients beyond just their file in front of me, I bet we could prove that EVERYTHING you said is correct!
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?
Financial Samurai´s last blog ..Do “C” Students Deserve “A” Lifestyles?
“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?
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
FinEngr,
you are no way put in that group. I think what Sam and I meant were those blogs that aren’t there to learn with the readers…rather discuss a topic authoritativly without really understanding/researching the ins and outs.
I’ve said this in the past. The best job is either being a weatherman or a economic adviser. Both get paid a lot of money, yet wrong most of the time
You still get paid if you wrong. Think about it, how many careers can say this?
Investor Junkie´s last blog ..How Much is 1% Costing You?
Check out these jobs!
http://www.cracked.com/article_18380_the-6-most-statistically-full-shit-professions_p2.html
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!
Financial Samurai´s last blog ..Do “C” Students Deserve “A” Lifestyles?
How about those blogs that have martial arts in the name but don’t know the difference between a katana and a ginsu….whooo! Thems be fighting words LOL
LOL!
Investor Junkie´s last blog ..How Much is 1% Costing You?
“a katana and a ginsu”, good fighting words. LOL. Nice comeback.
Money Funk´s last blog ..Menu Plan Monday
sorry for all the ? marks….its been a long day.
@Evan – as a CPA who sees about 300-350 tax returns each filing season, I have to agree with your list.
300 – 350 Tax Returns?! WOAH. I have no idea about industry standards but that sounds like a ridiculous amount of returns.
I guess it is a lot but I’m not working 65+ hour weeks like some of my colleagues so I’m fine with it.
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
Credit Card Chaser´s last blog ..How Much Will an Apple iPad Cost if Buying on Credit?
Let me know when it is up I’d be happy to read it. I go back and forth on the subject, but I am just telling ya what I see!
Same. Interested to read.
Same here.. I’m obviously in the not prepay camp, with current rates it makes no sense (or cents for that matter)
Investor Junkie´s last blog ..How Much is 1% Costing You?
To all lovers: looks like commentlove went through a site revamp. You’ll need to update your info.
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.
Investor Junkie´s last blog ..How Much is 1% Costing You?
A friend of mine in financial planning for wealthy tells me they keep lifestlye simple and invest a big percentage of their income…20-30% or more. They make sure thier money is working hard for them.
Ken´s last blog ..Weekend Roundup
@ 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?
ok.
Investor Junkie´s last blog ..How Much is 1% Costing You?
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.
Money Funk´s last blog ..Menu Plan Monday
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.
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.
Evan, you should also state what is HNW? It differs from place to place but it’s usually above 10 million in today’s dollars.
Investor Junkie´s last blog ..How Much is 1% Costing You?
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.
Investor Junkie´s last blog ..How Much is 1% Costing You?
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!
No need to apologize, I love comments! Maybe you should check out some of my other posts though LOL
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.
FinEngr´s last blog ..Which Way Are You Outsourcing?
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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…
Money Reasons´s last blog ..Stop Waiting For Magical Moments To Happen
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[...] presents Three Common Qualities of High Net Worth Individual’s Balance Sheets posted at My Journey to Millions. It’s always interesting to look at successes- but I [...]
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.
It is possible, but that is a huge jump from where I was going with this post.
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