A new study
by New York University economics professor Edward Wolff explains why advisors are wise to chase the wealthiest one percent.
Wolff sliced and diced the Federal Reserve’s Survey of Consumer Finances between 2007 and 2013. What he came up with from the myriad of data available is a clear delineation between the top one percent, the next nineteen percent and the bottom eighty percent.
The top one percent are defined as those with a net worth of more than $7.8 million; referred to as the “upper class.” Those with a net worth between $400,000 and $7.8 million, the next nineteen percent, are considered “upper middle class,” but still very wealthy. The remaining eighty percent, those with a net worth less than $400,000, are considered “middle class” or “poor."
While these are American statistics, many of the same observations can be made about the Canadian marketplace.
The most interesting statistic: the top one percent have just nine percent of total assets tied up in their principal residence compared to sixty-three percent for the middle class. In addition, the top one percent have thirty-six percent of their total assets in financial securities and/or pension accounts compared to just nineteen percent for the middle class.
What does this tell us?
A cold call made to someone in the top one percent, no matter their situation, is likely to generate a more favorable response than a call to someone in the bulging middle class and poor categories. That’s just a statistical reality and probably not a news flash to anyone having worked in the industry for any length of time.
It’s not that advisors should avoid working the middle class market, just that the top one percent, and even the next nineteen percent, have far more investable assets up for grabs.
Another interesting statistic: the top one percent have just five percent of the total debt. Advisors acquiring clients in this top echelon will have, on average, less work to do when it comes to budgeting and debt management and more to do on the investment, tax, and estate planning side of things.
With many Canadians planning to use the equity in their homes
to supplement their retirement income, there’s very little chance this cohort will ever have much in the way of investable assets for advisors to gather. Meanwhile, the top one percent have almost fifty percent of their assets invested in their own businesses or in other real estate.
That’s a critical point – as an entrepreneur’s business grows and it becomes more successful, less cash needs to be retained by the business making more available for stocks and other financial securities.
So, the next time someone asks you why your practice is focused on entrepreneurs and the high net worth client to the exclusion of average Canadians, remind them that’s where the big fish are.