FOOL'S EYE VIEW
How Wealthy Are You?

By David Kuo (TMFDragon)
June 20, 2002

If you happen to find yourself on the mailing list for financial products you may occasionally get invitations to join this bank or invest in that fund. Quite often those invitations might include a mini survey that asks about your investable assets. Furthermore that questionnaire will request that your answer exclude your property when evaluating your assets. How bizarre! Property is an asset and does indeed contribute towards your overall wealth.

That takes us neatly on to another issue, namely what exactly is wealth? We hear the term bandied about especially by those banks that are keen to expand their wealth management services. Banks are eager to attract wealthy customers to whom they can sell unit trusts, life insurance policies, mortgages and multi-currency accounts. Barclays (LSE: BARC) is known to be seeking to sell more products to wealthy individuals and private banking plays a significant part of the unit's private client strategy. Royal Bank of Scotland (LSE: RBOS) through its Coutts unit has about 70,000 wealthy customers. HSBC (LSE: HSBA) has also has a wealth management unit, which offers premier customers with credit balances of more than £40,000 special services.

However, we still haven't clearly identified what exactly constitutes an individual's wealth. Banks are very clear-cut over the issue. They see the amount of investable asset as an important, if not their sole criterion, when deciding who is wealthy and who is not. It is generally accepted that those with liquid assets of around £50,000 are deemed to be wealthy.

Very often we see the terms wealthy and high income used in the same breath. But of course wealth and income are two very different concepts. Income is a flow of resources that may be measurable in the form of cash. Wealth on the other hand is the ownership of assets valued at a specific point in time. Those assets might include a cash component. Other assets could include property, stocks and shares, the family heirloom, a pension or even a smattering of gold. Some of those assets, such as the cash component deposited in a building society account, could be income generating, as indeed the dividend payments from your share portfolio will be.

Not all assets can be readily sold however. The money tied up in your pension is a good example of an asset that cannot be cashed in at the drop of a hat. Nevertheless the performance of your pension fund, be it in the form of a company pension or a Self Invested Personal Pension, is a major contributor to your overall wealth. The difference between assets that are readily disposable and those that are not leads to the distinction between marketable and non-marketable assets. Nevertheless, it is the combination of the two forms of assets that contribute to our overall wealth.

In the UK it is estimated that some 36% of our wealth is tied up in non-financial assets, such as residential property (less any outstanding mortgages). A further 36% is locked into life assurance and pension funds, 16% in stocks and shares and a further 10% in currency and deposits. Only a small amount, just 2%, will be held in other assets that might include the valuable masterpiece on your wall or that really ugly antique sideboard that Aunt Agatha left to you in her will.

Our net wealth has been increasing by an average of just under 5% a year between 1987 and 2000. However, net wealth is the value of our total assets less our financial liabilities. Those liabilities have been edging up at 4%, only slightly less than our total assets have been rising. The total net worth of the household sector should be around £5,000b by the end of this year. That roughly equates to £87,000 for every man, woman and child in the UK or approximately £382,000 for the average household. Most people have less than this though, as there are a few very rich that push up this average by a significant amount.

There has been much talk about the "wealth effect" and how we are likely to spend less when our net wealth declines. Some economists believe that the recent rise in house prices has prompted consumers to increase spending. This is because they feel wealthier when their homes appreciate in value. However, falling share prices tend to have an opposite effect on consumer spending. This is because an equal, if not greater, proportion of our assets are tied up in share-related investments. Do you believe that the "wealth effect" can influence spending habits? Let us know in this poll.