DEFINING & MEASURING THE HNW MARKET
One of the perennial problems facing wealth managers and management consultants alike is the definition of “High Net Worth”, and a subset of this problem is what constitutes “Wealth”. In tackling this problem we have chosen to develop a set of metrics that provide a foundation for examination of the widest set of parameters of the HNW market.
MDRC’s definition of wealth is very narrow – “free and investable assets” i.e. individually owned financial assets that are available for investment or re-investment within a period of 26 weeks without penalty. One advantage of this narrow definition is that it is reproducible across all market segments AND across wider EU market . Another advantage is that it is relatively easy to move from this narrow definition to wider definitions of wealth: the reverse is, of course, not true.
However, our narrow definition excludes assets that may be manageable within a client portfolio but have legal or technical constrains. So in our reports we give values for both the narrow and expanded definition of HNW.
Definitions of wealth frequently seen in the EU are:
- Marketable wealth” – assets identified for inheritance tax; this definition includes houses, stocks and shares, and other saleable assets but excluding accrued pension rights and excluding the prime residence. This is a very wide definition, useful for newspaper headlines but of limited value in understanding the drivers of the HNW market. HNW market size assessments using this definition assume that the composition of assets of current HNW individuals are the same as those of the HNW who have recently died (the “Estate multiplier”)
- Free wealth” – a widely used phrase, but without any commonly accepted definition. When this is used it seems to relate to “Marketable wealth” but excluding investments in fixed assets but including joint holdings. This too suffers from the “Estate multiplier” distortion.
Neither of these definitions can be translated into reproducible market size assessments by country.