Your client might be worth more than they imagine. This can put them in a good mood. You think your client has assets held away. They owe money, but you do not know how much. Preparing a wealth report, also known as a net worth statement is a good way to get this information out into the open.
It makes sense for advisors to deliver an annual performance review (1) for every client. It’s even better when they get a quarterly performance review, which might be a lower key exercise. Ideally the advisor wants to deliver more than one type of review a year. Why? Because reviews can be a “call to action.” Another case for different reviews is clients reach a saturation level. At some point, they stop listening and just want the meeting to end. A second type of review is the retirement planning review. (2)
The third type of review is a Wealth Report. The object is to bring together information about their assets and liabilities, arriving at a net number. This can be pleasantly eye opening. Everyone talks about “one percenters.” According to Kiplinger using 2022 figures, in 2022, $10,815,000 in assets puts you in the top 1%. (3) Does that seem out of reach? Would you be satisfied to make the top 2%? That threshold is $2,472,000. Fans of Hart to Hart will recall Jonathan Hart was a “self made millionaire.” If you have $1,030,000 in assets, you are in the top 5%.
Tallying Liquid Assets
What kind of data do you need to calculate your client’s net worth and produce their wealth report? You firm likely has a software program that can produce the report for you. This likely includes:
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Assets at the firm. This is the easiest part of the data gathering process. You have this information in front of you.
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Assets held away. Your client might have one or two more financial advisors. They might have an online stock trading account.
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Securities in certificate form. This might seem unlikely, but don’t completely rule it out. Years ago, corporations did issue 100 year bonds. They might have been issued in 1937 with a maturity date of 2027. You never know what clients have tucked away.
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Retirement assets at work. They should have a 401(k) with their employer. It is possible they have a workplace annuity. Does the company have a defined benefit retirement plan? This is likely accounted for in the retirement plan review, but does it have a cash value? There is a variation on the defined benefit plan, the cash balance pension plan that may fit into this category. (4) Is the employee vested?
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Orphaned IRA accounts. Sometimes clients have additional retirement assets from previous employers that were rolled into IRAs upon their departure. They might have opened an IRA at a bank and forgotten about it. Have they inherited IRA assets as a beneficiary when someone in the family died? (5)
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Bank based cash assets. This means CDs and money funds. This also includes checking and savings accounts, even Christmas Club accounts.
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Stock and options held at work. Your client’s compensation might include deffered stock and options. They might participate in the company’s employee stock purchase plan, buying shares on a regular schedule at a discount. These shares are generally held at the firm.
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Deferred compensation. Your client might be paid their salary and bonus in different ways. Thery may be entitled to it, but not immediately.
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Cash value of insurance policies. Your client might have purchased whole life insurance. They might own annuities and still be in the accumulation phase. What is the cash value?
Tallying “Hard” and Illiquid Assets
Now we get into an area where values are likely to be estimated. This includes:
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Business ownership. This is often their biggest asset. They have grown the business from the ground up. They will need to decide if someday they will monetize this asset or pass it down to the next generation. What is their largest asset worth?
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Their primary residence. If they own their own home, how can you come up with an estimate of it’s value? Sites like Zillow show be able to help.
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Vacation property. Do they own a beach house or cabin in the mountains? How about an pied a terre in the city? Can you put a value on the property?
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Timeshares. This is more difficult, since it’s a “quasi asset.” It might be relatively illiquid, but they pay annual maintenance and might have spent a bundle to buy it. Try to include it.
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Rental property. Your client might own income producing property. It might be residential or commercial. Their accountant likely treats it as a business entity for tax reporting. What is it’s value?
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Precious metals. Gold might be the original hard asset. Do they own it in physical form? Is it held by a custodian on their behalf?
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Cryptocurrencies It has been said 13% of Americans own digital assets. (6) If these aren’t held at your firm in some form, they are likely held elsewhere. Perhaps not a hard asset, it is an alternative investment.
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Jewelry. This has often been a form of portable wealth. There are many categories in jewelry, primary ones are precious metals and precious stones. The retail markup on jewelry is quite high, however a licensed appraiser can provide a value estimate. It’s likely your client has an idea what their gems are worth.
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Artwork. You can make the case certain categories of artwork have exceeded stock market returns in the auction market. Most auction houses have valuation days, similar to what you see on Antiques Roadshow. Your client likely knows what they own.
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Collectibles. This is a huge category. It includes everything from baseball cards to stamps to comic books to firearms to watches and fine wine. Some, like sterling silver flatware, store most of the value in the underlying precious metal. Other items like fine china, crystal and furniture are only expensive once. If your client is a collector, they have an idea of the value.
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Organizations where they have an equity state. Your client might belong to a country club, organized on a shareholding system. This has value.
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Others. Have they loaned money to a family member? If they have it in writing, it should be on the list.
Liabilities
Most people owe money. They don’t like to talk about it.
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Mortgage on their primary residence. The amount they owe should be printed on their monthly mortgage stamen, including the interest rate.
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Mortgage on their vacation property. Like the mortgage on their home, this information should be easy to find.
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Mortgage on rental properties. Again, this should be readily available to your client.
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Their Home Equity Line of Credit. This is secured by their home, similar to a second mortgage. Their statement should show the outstanding balance and current interest rate.
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Credit card debt. If your client has several cards, this might be larger than they imagined. You want to learn how much they owe in total and how much each card is charging in interest.
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Margin debit. This is usually netted out in the value of the account on their brokerage statement.
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Personal bank loans. There are many ways to borrow. Your client might have taken out a conventional loan from the bank.
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Student debt. If not too much time has passed since your client graduated, they might still be making payments on a student loan. How much do they owe? What is the interest rate?
All this information represents inputs for a report you should be able to generate on your desktop through your firm’s technology. It might be the first time your client has seen all this information in one place.
Gathering this information, even if some of the numbers are only estimates, should be eye opening for your client. It should also uncover other areas of their financial life where you are able to add value.