The rising wealth of tech companies—along with the advent of the gig economy and digital assets such as cryptocurrencies—has resulted in a growing number of young HNWIs, including millennials and Gen Zs.
What is a high-net-worth individual (HNWI)? Where do they live? Which industries do they work in? What are their backgrounds? There seem to be as many definitions as there are news outlets, financial institutions, and private wealth advisors. But most importantly, does this label apply to you? You might be surprised…
Who is commonly defined as the HNWI?
A high-net-worth individual is broadly defined as a person with $1 million or more in liquid assets—in other words, cash or assets that can easily be converted into cash, including checking, savings, money market accounts, stocks, bonds, and mutual fund shares. Non-liquid assets such as homes, vehicles, or property don’t count.
The US Securities and Exchange Commission (SEC) requires registered investment advisors to file paperwork indicating how many of their clients are HNWIs, and its definition is a little different. According to the SEC, advisors must report clients as HNWIs if they have at least $750,000 or more actively managed with that advisor. The SEC also instructs advisors to define clients as a high-net-worth individual if the advisor reasonably believes the client’s total net worth exceeds $1.5 million.
While the definition might still be a bit imprecise, what is clear is that HNWIs require specialized services, including diversified investment accounts, actively managed portfolios, and individually tailored financial planning advice.
HNWIs: Stats on Demographics and More
According to WealthX’s 2019 High Net Worth Handbook, 10 countries make up 72.5% of the global HNWI population (defined as those with a net worth between $1 million and $ 30 million).
The United States is home to 40% of the world’s high-net-worth individuals, some 8.6 million. China is in second place with 1.8 million HNWIs, followed by Japan, Germany, the UK, and France.
It comes as no surprise to learn that New York City has more high-net-worth individuals than any other metropolis on the planet, with just under a million of the world’s wealthiest. This is 65% higher than second-placed Tokyo with 593,025 HNWIs. Moreover, the US now boasts six of the top 10 cities including Los Angeles (third with 576,200), Chicago (sixth), San Francisco (eighth), Washington DC (ninth), and Dallas–Fort Worth (10th).
And wealth is growing. WealthX reports that in 2018, the percentage of HNWIs rose by almost 2% to 22.4 million individuals, collectively worth some $61.3 trillion. Europe saw the biggest increase (4.5%), followed by the Middle East (3.1%), and North America (2.1%). Looking ahead, growth is expected to be concentrated in the Asia-Pacific region—China in particular.
We’ve turned the spotlight on where HNWIs live. But where does their wealth typically come from? And how do they usually invest it?
Almost 84% of HNWIs are self-made, with only 4.5% deriving their fortunes from inheritance alone. Favored industries include finance, banking, and investment, followed by manufacturing, technology, business services, and construction and engineering. Their investment portfolios typically comprise 40% liquid assets (mainly cash) in addition to 23.5% private holdings, 20% public holdings, and 16% alternative assets.
This elite group has traditionally been dominated by older males. However, the demographics of HNWIs are changing. The rising wealth of tech companies—along with the advent of the gig economy and digital assets such as cryptocurrencies—has resulted in a growing number of young HNWIs, including millennials and Gen Zs.
As demographics change, so too do investment needs. Younger HNWIs are more involved in their investments, demand greater transparency and efficiency, and often require environmental, social, and corporate governance (ESG) options. They need a wealth advisory firm that can leverage data and technology to combine the best advice with hyper-personalized services.
Women also make up a much larger proportion of the group, thanks to rising female entrepreneurship and, to a lesser degree, inheritance. According to the 2021 Capgemini Wealth Report, the percentage of female entrepreneurs in the US has risen 114% in the past two decades, while women now own 40% of businesses.
What About the 1%?
The 1% come from many different backgrounds and industries. They are industrialists, business people, financiers, executives, engineers, and medical professionals, as well as those who’ve inherited their wealth.
But what qualifies someone to join the elite 1% of the world’s wealthiest people? Or, for that matter, the top 5% or 10%? Do you meet the criteria?
Forbes reports that the household net worth of the world’s richest 1% starts at a minimum of $10.37 million, while a net worth of $1.18 million or more establishes a HNWI in the top 10%. Further, the number of billionaires around the world has been growing—rising to almost 2,800 on Forbes’ 2021 list. Their total wealth now exceeds $13.1 trillion.
Questions relating to wealth are also relative, and largely dependent on where a person lives. How much wealth do you need to occupy the top 1% in the US, or even Taiwan or South Africa for that matter?
According to the Knight Frank 2021 Wealth Report, a member of South Africa’s affluent 1% owns net assets worth at least R2.7 million—that’s 180,000 US dollars. In Kenya, you’d only need around $20,000 to be considered one of the country’s most privileged. At the other end of the spectrum, no less than $7.9 million would be required to join Monaco’s super-rich. Switzerland’s one-percenters are the next most exclusive with a cut-off of $5.1 million. The US follows in third place at $4.4 million.
The prospects for further wealth creation post-pandemic are huge, particularly on the Chinese mainland and in India, with the latter expected to see its 1% wealth threshold increase two-fold by 2026.
America’s Wealth Distribution
Federal Reserve data published in June 2021 reveals that America’s wealthiest 1% collectively control some $41.52 trillion, which is 16 times greater than the $2.62 trillion controlled by the bottom 50%, and more than the combined fortunes of the middle and upper-middle classes. The gap has widened considerably since 1990, when the top 1% had about six times the wealth of the bottom 50%.
Middle class wealth has also increased in the last 50 years, although most of this growth was recorded between 1970 and 2000, when the median income rose by 41% to $70,800, at an annual average rate of 1.2%. Subsequent growth rates have been a lot slower, registering an annual average of just 0.3% from 2000 to 2018, to reach $74,600.
Other recent figures from the Federal Reserve indicate that the net worth of households and nonprofits has risen by 3.8% since the end of 2020. However, since most of this growth was registered in stock and real estate holdings, the main beneficiaries were the richest 10%, who own some 89% of US stocks and mutual funds. The top 1% have also made substantial gains on the stock market, primarily because they own more than half the equity in both private and public companies.
What are some specific wealth concerns of the HNWI?
Whether you fall in the top 10%, 5%, or even 1%, how do you protect your wealth? You must deal with changing tax codes, optimize estate planning, and prepare to sustain your lifestyle during retirement. These are just a few of the many concerns that are unique to the HNWI.
Changing Tax Laws and Tax Codes
Tax breaks—or lack thereof—for the high-net-worth individual have been a complex issue for the past couple of decades. Indeed, proposals regarding wealth tax have become an aptly-termed “political football,” dividing the major parties and the public along ideological lines.
Cutting taxes for the wealthy and corporations is a central feature of trickle-down economics. It’s meant to benefit all players in the economy by freeing up funds, which can then be invested in job-creating enterprises. On the other hand, many people argue that the middle class is already overburdened, and the wealthy and ultra-wealthy need to up their contributions accordingly instead of utilizing the tax advantages available to them.
The Tax Cuts and Jobs Act of 2017 made substantial amendments to the tax code, including lowering the top tax bracket rate from 39.6% to 37%. Compare this with a top rate of 70% in 1980 and 91% in 1963, and it’s evident that wealthy Americans have never had it better.
The current administration’s tax proposals aim to return the top income tax rate to 39.6% for individuals earning above $452,700 per year, as well as married couples who make more than $509,300 annually. At the same time, there are plans to raise capital gains tax to 39.6% for those earning $1,000,000 or above.
Estate Planning and Wealth Succession
Many a high-net-worth individual wants to preserve the wealth they’ve earned—not only for themselves, but for their children and grandchildren too. At present (2021), an individual may pass up to $11.7 million is tax-exempt, thanks to the Tax Cuts and Jobs Act. A properly drawn living trust can double that amount for a married couple. A rate of 40% applies for anything above the exempted amount, which compares very favorably with the maximum estate tax rate of 55% levied some 24 years earlier. Where applicable, also remember to factor in individual state “inheritance” taxes laws.
There are various wealth succession strategies for HNWIs to pursue. The number of different wealth succession options on the table all have their pros and cons, and it takes time and dedication to assess what the right combination of strategies may be to handle your assets. The right wealth advisory firm can assist HNWIs seeking to ease the burden of estate taxes.
Preparing for Retirement
Working professionals who’ve been actively involved in wealth generation throughout their lives may feel hesitant about stepping away from their work during retirement and facing a possible loss of income.
No matter how successful one’s business endeavors have been, a little assistance in financial planning can help—especially when it comes to preparing for retirement. A well thought out financial plan can show HNWIs what they can expect in the way of income and growth from their portfolio with some degree of certainty. This can give the individual peace of mind and “permission” to draw upon their funds to support their retirement needs.
Dealing With an Economic Downturn or Recession
Even a high-net-worth individual isn’t immune to recessions and economic downturns. Balancing risks and rewards can be a tough call. Play it too safe, and potentially face diminishing returns on investment. However, high risk investments can set back a HNWI due to capital loses. It takes financial expertise to navigate market trends and build a portfolio into a stable source of income.
Managing Your Assets as an HNWI
Today’s the high-net-worth individual is faced with many challenges, but they’re also exposed to better resources than previous generations to navigate the ever-changing investment landscape. HNWIs have evolved. They have specific needs and aspirations, and they’re more likely to be active participants, seek customized services, and look for investments focusing on environmental, social, and corporate governance (ESG) options.
With a reputation built on decades of experience, Polaris Wealth Advisory Group is qualified to understand the needs and goals of the current HNWI demographic, including non-traditional investors.
While people change, so do the markets. Polaris offers smart financial planning along with tactical portfolio management to help actualize your best interests, tailored to your individual financial needs. Consolidate your wealth advisory needs under one roof, and contact us today.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
