Global

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  • Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 5/20/2013

The challenges of today’s economic environment for high net-worth individuals 

The challenges
It’s tougher than many think for the wealthy to maintain their current lifestyle in the face of continuing global economic woes. The recession has impacted on everyone – rich and poor, alike. For high net-worth individuals, the current economic environment brings its own particular set of challenges and they, too, have had to adapt to changing times.

A high net-wealth individual (HNWI) is generally defined as an individual with a net worth (i.e. financial assets, not including their primary residence) in excess of US $1million. It’s an elite group – many major financial institutions have departments geared towards servicing HNWIs; whilst other banks are targeted exclusively at such individuals.

Reigning in spending

According to the Wall Street Journal, the wealthy are emerging different consumers than they were before the start of the financial crisis. Surprising though it may be, wealthier households appear to be more risk-averse in tough times, points out a recent report by the MIT Sloan School of Management, and have slowed their spending in reaction to the economic crisis to a far greater degree than have their less wealthy compatriots.


These days, high net-wealth individuals are:


  • More thrifty – creating budgets and sticking to them
  • More choosy – spending hard-earned dollars on experiences which bring them joy, like travel or high-quality vintage items, rather than impractical luxuries
  • Curbing impulse buys – focusing on buying what they need, rather than what they want
  • Shopping around – comparing prices from store to store or supplier to supplier and negotiating to get the best deal
  • Waiting for coveted items to go on sale, first, before they buy
  • Eschewing brands for no-name brands, if the quality is comparative.

Stay out of debt to build wealth

According to Forbes Magazine, 75% of the high net-worth individuals on their Forbes 400 list say the number one key to building wealth is to get out of debt and stay out of debt. Furthermore, the wealthy don’t use lines of credit to purchase more ‘stuff’, they enter into debt with an end-goal in mind; to use it as a lever to acquire greater funds for future investments down the line.


In other words, they wish to show credit providers that they can pay off their debt in order to grant them access to more credit, which they can re-invest in further assets, and so on, accumulating their net worth as they go. Typically, high net-worth individuals…


  • Think strategically about the debt they take on and why they wish to do it
  • Devise a solid plan for paying off debt and a date by which to do it
  • Pump any extra money into paying off debts early, to save on interest and maintain a spotless credit record.

Saving and investing

High net wealth individuals are wealthy because they save their money, instead of spending it. High net worth investing in the current economic environment is characterised by:


  • Capital Preservation – an investment strategy where the primary goal is to preserve capital and prevent loss
  • Risk aversion – wealthy individuals are putting safety above yield when making investment decisions
  • Investing in some products which keep pace with inflation (since high-safety, low-yield investments can be adversely affected by inflation)
  • Thorough research into the financial health of banks, stocks and other investment vehicles
  • Diversification – don’t put all your eggs in one basket, as the old adage wisely advises
  • Seeking help from professionals to find the best tax-friendly or tax-exempt investments, and to craft a well-balanced savings and investment portfolio which fits their unique situation and requirements.

Christophe Bernard

Christophe Bernard
I am a KPMG partner based in the French firm’s Paris office, responsible for encouraging the growth of our firms’ middle markets practice across Europe, Middle East and Africa, a majority of that market comprises of family businesses.
 

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