Understanding the Five Categories of Wealth
The financial services industry likes to use the expressions “high net worth” and “wealthy.” Often, they sound like “more money than you’ve got.” Few people are comfortable identifying themselves with those expressions, especially when politicians talk about “taxing the rich.”
We know wealth means different things in different parts of the world. Bain & Co. released a report in May 2015 that referred to high-net-worth individuals in China as having investable assets of 10 million renminbi (RMB) or about $1.6 million USD – which might be small change to people whose identities were leaked in the Panama Papers.
You are an accounting professional in the United States. You work with individuals and privately held businesses. Because people who have money need help holding onto it, you want wealthy people as potential clients.
Consider wealth in four primary categories based on combinations of high and low assets, and high and low cash flow. Then we will add a fifth category.
High Asset, High Cash Flow Wealth
These people have money, and they make good money. They are senior officers at listed public companies, the folks who are named in the firm’s annual report. They are owners of privately held businesses, often family firms.
In 2013, Forbes estimated there are 27 million businesses in the United States, less than 1 percent being publicly traded companies. Certain established professionals also fit into this category. You can easily think of established doctors or attorneys who are in private practice. Their tax returns may be complicated. They own businesses that file returns, too.
Low Asset, High Cash Flow Wealth
These people are best described as “people who work for someone else.” They make terrific incomes and have plenty of disposable income, but they haven’t socked away a substantial nest egg. If they are clients, you are probably advising them to max out their retirement account funding. They aren’t major prospects for brokerage firms because they don’t have more than $250,000 in investable assets, but dollar-cost averaging or saving a specific amount each month makes sense for them.
In a world where credit is tight, their combination of good credit ratings and high cash flow make them good mortgage prospects for local bankers. These people are often in such professions as engineering, science, and medicine.
High Asset, Low Cash Flow Wealth
This is the “old money” wealth stereotype – the ancient country club member or Thurston Howell III on Gilligan’s Island. They have money, but it’s not really theirs. It may be entailed in trusts or the wealth is actually farmland. Because they can’t spend the money, they don’t. This often earns them the description of “cheap” or “miserly.”
Let’s look on the positive side. Many wealthy families are deeply engaged in philanthropy. Supporting the arts or education are traditional pursuits. Money is sometimes given outright – the institution asks for a check and gets it. Other times, estate-planning vehicles, such as charitable gift annuities or charitable remainder trusts, are used. Because they are involved in the community, they are not that difficult to meet on a social level.
Low Asset, Low Cash Flow Wealth
The fourth category isn’t wealth at all. It comprises people who fund their lifestyles on debt so they appear rich and get into the right circles. It also includes the people who used to be wealthy but lost most of their money through poor estate planning or overspending. As Raymond Reddington remarked in an episode of The Blacklist, “65 percent of inherited wealth is gone by the second generation; 90 percent by the third.”
As an accounting professional, you realize there’s neither cash flow nor assets here, but they still need help.
The Fifth Category: Under the Radar
The first three categories of wealth are often easy to spot. You see the public company CEO on CNBC. You see the successful doctor driving the late-model Porsche. You drive by the ancestral home of an established family, noticing streets are named after them.
The fifth category, “Under the Radar,” is best described by Tom Stanley in his book, The Millionaire Next Door. The premise of the book can be summed up in 25 words: “The plumber who has always lived in one house, stayed married to one person, and owns a midpriced American car is probably worth a fortune.”
These people often make very good money, but don’t fit neatly into a specific category. They make money legally, but don’t brag about how they do it. They may have found a comfortable niche as a subcontractor on projects paid for by the US government. They may collect farm subsidies. Because they are so low-key, they are the most difficult to find.
Because they have money, they need help, too.
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Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.