How the World’s High-Net-Worth Grow, Sustain and Manage their Fortunes (2008)

By Associates of Merrill Lynch and Capgemini

The advance of technology has brought major changes from transaction based advice to wealth management. Microsoft CEO Bill Gates said that “the Internet changes everything.” Now that the customers can deal directly with manufacturers and service providers, there is little value added in simply transferring goods or information.  This is the phenomenon of “disintermediation” – the eliminiation of the middlemen – threatened to disrupt just about every industry.

However too much information kills information. Technology is only useful if it helps the advisor to perform his or her primary task, which is to select the most meaningful to meeting the needs of the client. Even with the most up-to-date technology, it can be difficult to maintain a comprehensive view of the present, let alone the future.

In addition to asset management, skilled liability management can be critical to a client’s broader financial health and well-being. And as investor sophistication increases, advisors and clients alike realize that a comprehensive approach demands leveraging liabilities as a way of preserving and even gaining wealth.

The key concept here is opportunity cost – for many sophisticated investors, taking on a liability in one area of the portfolio produces an asset in another. This is why, according to a Federal Reserve Board survey of Consumer Finance, the US nation’s richest 1% took on US$342 billion in new debt between 1998 and 2004. This 1% now holds 7% of the nation’s debt, with a total of US$650 billion, up from 5% in 1998. So does this growth mean that High net worth individuals have lost their financial discipline?  Not by a long shot.

For many high net worth individuals, debt is a financial tool, a way to allocate resources to the most high-yielding investments. Which is better, paying cash for a US$10 million ranch or taking out a 6.5% mortgage and plowing that US$10 million into a private equity fund that’s expected to yield 20%?

Non high net worth individuals, on the other hand, typically don’t have that kind of cash to redirect, and thus aren’t targeting investments to offset the interest payments they are taking on. Interest payments on home equity lines of credit and credit cards detract from their wealth, while high net worth individuals take on a debt specifically to expand their wealth. What’s more, the high dollar amount of debt being taken on by high net worth individuals can be a bit deceiving. True, their debt is increasing, but debt for the top 1% still represents only 3.7% of their total wealth. For those in the fiftieth to ninetieth percentile, debt represents 24% of their total wealth.

Borrowing is frequently employed in conjunction with an estate plan or generational-transfer strategy. Life insurance may be purchased by HNWIs to help heirs pay estate taxes, the dilemma then becomes how to pay for the hefty premiums. The answer : by pledging marketable securities along with cash value of the life insurance policy, the high net worth individuals can borrow against the policy to fund the premiums, eliminating out of pocket expenses.


Many high net worth individuals (HNWI) experience a degree of tension between the seemingly conflicting needs for comprehensive reporting and privacy. In a perfect world, not only HNWIs but everyone world prefer a single easy to read report encompassing all assets held by all providers -domestically and internationally.

However some HNWI understandably hesitate to share all their financial information with any one entity out of fear that their privacy will be compromised. Such information might, for instance, entice and FA to focus on luring those assets to his or her firm instead of focusing on advice and performance.

Such reluctance to share information for fear of being oversold is merely the tip of the iceberg. In reality, people may have multiple reasons not to want to pull all their financial together to provide a single, unified, easy to read view. A nasty divorce, estrangement between relatives, or murky business arrangements may require what some might regard as a dubious level of discretion.


In some areas of the world, privacy needs to be guarded to avoid confiscation of assets by governments, or even the prospect of actual physical harm. In describing visits to clients in Latin America, relationship managers recall being told not to bring documents, a laptop or even business cards, out of fear that their family’s security might be compromised if the level of their wealth were to be exposed. Many HNWIs in insecure region or countries have very real reason to fear increased prospects of them and/or their family members being kidnapped the more people know about their total net worth.


This book also talks about wealth transferring to the next generation, and also of the ultra rich’s concerns that their children will squander their lives and failing to live up to their full potential.  However keeping the salaries and value of stock options secret from today’s tech savvy kids has become increasingly difficult – if not impossible, as they just need to google it.


Warren Buffet famously summed up the view of many HNWIs when he said that he wanted to leave his children “enough to do anything, but not enough to do nothing.”

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