Where Do High-Nets Keep Their Money?
As the first generation of wealth creators, HNWIs and UHNWIs know how to build fortunes and identify money-making opportunities. But where do the rich store their wealth? Our study shows that 75% of them concentrate their assets in categories that are riskiest in the context of family wealth transfer. What are these assets, and what are the associated risks?
KEY POINTS
High-net-worth individuals often follow common misconceptions in assessing asset liquidity in relation to family wealth transfer. In reality, it’s not the same as the ease of transferring assets to the next generation.
31% keep their money in deposit boxes, banks, or brokerage accounts.
Only 3.29% have investments in alternative assets. These include art, collectibles, wines, digital assets, rare cars, and others.
Wealthy families: portfolio structures
$340,000 per $1,000,000 is an average loss during the family wealth transfer for HNWI and UHNWI families. It can reach 72%-91% for certain asset classes. Overall, these families bear three-quarters of all total losses that occur during the transfer.
To uncover the reasons behind this, we surveyed 13,500 capital founders from 18 countries. Their net worths range from $3 million to $99 million. Penguin Analytics, our report, also analyzes the portfolio structures of wealthy families.
TOP 5 MOST POPULAR ASSETS:
Residential real estate - 12,5%
Bank accounts - 12,4%
Brokerage accounts - 10,8%
Stock and shares in private companies - 9,1%
Stock in public companies - 8,1%
TOP 5 RAREST ASSETS:
Family (private) funds, trusts - 0,45%
Tokens secured by physical assets - 0,62%
Rights to intangible assets - 0,65%
Planes, helicopters, yachts, boats - 0,75%
Venture fund investments - 0,83%
High-nets tend to favor conservative or ultra-conservative portfolio structures. The breakdown shows that respondents hold 53.4% in non-financial assets and 46.6% in financial assets.
Cash and cash equivalents
Market reports identify that rich people allocate 25% to 34% of their assets to cash–more than any other asset class.
In emergencies, access to cash offers the agility for quick decisions. This is why the wealthy often keep much of their wealth in cash and cash equivalents.
Yet, with prevailing inflation rates, the focus on cash diminishes. Inflation erodes money's purchasing power.
4.7% of capital owners know that 22.7% of bank deposit boxes are overdue at any time. Access to them is restricted. Also, 14.2% of deposit boxes worldwide do not have current identified owners.
2.6% know that in some countries if a deposit box is not renewed on time, the bank will open it with the police present. To retrieve the money and valuables, you must explain the origin of the funds.
Real estate
Currently, high-nets hold about 12% to 15% of their wealth in real estate.
Often, they first invest in their primary residence. Afterwards, they buy more properties. They typically rent these out. Later, some may add commercial properties to their portfolio. These include office buildings, hotels, warehouses, and more.
Real estate might not offer quick liquidity. Many people view it as a profitable long-term investment. It also provides reliable passive income for millionaires.
Owning real estate allows for tax-free growth in net worth. Property values are only taxed when you sell.
About 16% of prestigious homes worldwide are classified as “owner not identified”.
Bonds
Wealthy individuals put 12%-15% of their wealth into bonds. The pro is adding a stable asset to the family portfolio, which generates a steady income stream.
Bonds are considered a safer choice than stocks. The downside is lower returns.
On the other hand, it's an asset tailored for wealth storage. Some bonds are optimized for taxes. Others help to hedge portfolios against inflation.
Active bond management might be required from wealth owners due to inflation or political instability.
Private equity and hedge Funds
Dividend stocks
Penguin Analytics indicates that UHNWI and HNWI families dedicate 17.2% of their assets to stocks, with which they target two main goals.
First, they aim to expand the share in their portfolio that generates passive income. Dividend-paying stocks complement rental income from real estate.
Second, high-nets focus on diversifying not just their portfolios but also their time. Consequently, they’re on a mission to save room for new experiences rather than dedicating all of their time to managing investments on a daily basis.
Dividend stocks check all the boxes. Additionally, they offer some tax advantages as well. A long-term investment in stocks also allows their net worth to grow tax-free through capital gains, as profits in appreciating stock prices are only taxed when sold.
Mutual funds and ETFs
A recent study identifies that high-nets keep a growing portion of their assets in mutual funds and exchange-traded funds (ETFs). Millionaires are attracted to them as a fast-track option to diversify their portfolios and adjust investment strategies to market shifts.
In essence, ETFs serve as an investment vehicle to pick out new assets without the need to directly acquire them. For example, at the beginning of 2024, the first bitcoin ETFs received a green light from the U.S. Securities and Exchange Commission (SEC). BTC ETFs allow investors to gain exposure to the price movements of BTC, but without actually holding the bitcoin itself.
In the end, mutual funds and ETFs contribute to building an extra security layer in portfolios to mitigate risks.
Brokers have legal grounds not to answer the family's requests. They can do so if details are missing. These include account and contract numbers, and specifics of the signing entity. The latter can be challenging. Some brokers manage between 30 to 250 licensed and sublicensed entities. This is especially true when the contract is signed online.
Alternative investments
Passion assets, collectibles, crypto, art, fine wines, rare cars, and other alternative investment assets are not a priority for high-nets. According to Penguin Analytics, just 3.29% go for them to structure family wealth.
The explanation might be the following. As mentioned above, UHNWIs and HNWIs prefer conservative or ultra-conservative portfolio structures. Most of them have no exposure to alternative investments. They may also feel insecure about locking their fortunes in asset classes where liquidity level might seem challenging to assess in the long term.
Cryptocurrencies, like Bitcoin and Ethereum, are more volatile than tokens tied to physical assets, like platinum and oil. Meanwhile, they are more popular among our respondents. 4.32% invest in cryptocurrencies versus just 0.62% in asset-backed tokens.
4 Key Questions
What do HNWIs and UHNWIs get wrong in assessing asset liquidity?
People often prefer certain financial assets because they assume they are more liquid than others. High-net-worth individuals believe these assets are quicker to transfer to family members.
In practice, the process is not as efficient as expected. Capital loss risks peak during both planned and unplanned transfers.
Furthermore, the situation has recently become more complex. This is due to KYC requirements. They regulate matters of ownership continuity and sources of wealth origin. The rules get stricter when the founder transfers capital to family and successors.
What do millionaires do with their money? What are the most commonly included assets in family portfolios?
Families mostly prefer cash and its equivalents. 31% keep their money in deposit boxes, banks, or brokerage accounts. Real estate makes up 12.5% of their portfolios. Next comes stocks in private companies at 9.1%, and stocks in public companies at 8.1%.
What are the less common investment choices?
Lesser-chosen assets include private family funds and trusts at just 0.45%. Also, tokens backed by physical assets are at 0.62%, and rights to inventions at 0.65%. Planes, helicopters, yachts, and boats are at 0.75%, and venture fund investments at 0.83%.
Why is it important to keep up-to-date information on family wealth?
We named our report Penguin Analytics. Why?
Simply, penguins are remarkable creatures. They are family-oriented. They are highly adaptable to both heat and cold. Penguins swim underwater at speeds of up to 24 to 40 kilometers per hour.
Yet when they step onshore, penguins become somewhat clumsy and ultra-slow, waddling at 3–6 km/h at most.
The penguin metaphor reflects UHNWIs and HNWIs owners and the transfer issue. They’re highly skilled people at building the first generation of wealth.
However, the task of passing it to the next generations within their family is a “penguin-on-shore” thing to them. The majority show lackluster results. Statistics are not on their side–7 out of 10 family wealth transfers fail.
Penguin Analytics shows that families with a net worth from $3 million to $99 million are most at risk during the transfer. They account for 75% of total losses in this process.
A study indicated that only 2% know that, on average, up to 31% of family wealth is lost during transfer due to gaps in data.
A report outlines that to transfer assets effectively, you need to know up to 22 attributes for each asset. The founder and family often have a knowledge gap. This troubles families to find and claim assets.
Owner.One for family assets and capital information
Owner.One focuses on algorithmic hands-free transfer of assets data from a capital founder to family members.
Wealth transfer self-acting algorithms will work automatically, never too early, never too late, but just-in-time. It will be triggered by life events, outlined by the owner and will reach the addressee.
Wealth owners will get a client-owned autonomous infrastructure for inventory, control, and transfer of capital and assets data. No third parties are needed.
Customers can store, manage, and transfer information on banks and brokerage accounts, real and commercial estate, legal entities, stocks, jewelry, crypto, and commodity tokens. In total, over 40 assets are covered.
For each, there is a specially designed template within the app. Once filled in, it ensures that all the information needed for a successful transfer or to meet KYC procedures is armed and ready.
Conclusion
Penguin Analytics uncovered capital founders’ misconceptions about how they assess asset and capital liquidity and the reality of wealth transfer.
For example, many stick to conservative portfolios with prevailing shares of cash and real estate. At the top of their minds, these assets are the first choice to store family wealth.
On the contrary, the real environment of family wealth transfer is more than meets the eye. On a global scale, $260 billion of personal financial assets are in 'search' status. About $400-$420 billion in assets and property remain unclaimed. For digital assets, the estimate reaches 23.7%.
These numbers correlate with the overall level of loss that families experience when transferring wealth from one generation to the next. It totals 34%, but peaks at 91% for certain asset classes.
How do HNWIs and UHNWIs avoid the family wealth transfer trap? Consider these steps:
Switch to modern tech setups to store wealth information. Unreliable approaches to storage cause annual losses of 1/6 of asset record history.
Assess the liquidity of your portfolio for possible transfer. Identify gaps in data that block compliance with KYC requirements.
Review your assets' vital attributes. Identify the required time periods to update them. On average, it takes a year to complete this task without automation tools.
Disclaimer
The provided content is intended for informational purposes only and should not be construed as financial or investment advice. We advise all readers to conduct their own research before making any investment or financial decisions.
While Owner.One endeavors to keep the information up-to-date and correct, we make no representations or warranties, express or implied, regarding the completeness, accuracy, reliability, suitability, or availability of the information for any purpose. Any reliance you place on such information is strictly at your own risk.