Even Ultra-Wealthy Investors are in Debt


 The national debt has been a subject of great political discussions recently, with many politicians and Americans nervous about the over $27 trillion dollars the U.S. has in debt.  The topic remains in the media due to the talks of stimulus packages and the possible addition to our federal debt.  Debt is not a new topic in the news, and it is a tool that many individuals utilize on a smaller scale within their own financial planning.  Utilizing financial leverage in various capacities is commonplace among wealthy investors, but how common is it among the ultra-wealthy?

What are some of the forms of debt that investors can have as part of their financial picture?  The most common are a mortgage on their primary residence, automobile loans, and credit cards.  Less common are second mortgages, home equity loans, or margin loans.  Thirty-five percent of investors have a first mortgage, according to recent research from Spectrem Group.  The average amount of first mortgages for wealthy investors is $191,000.  Investors at lower levels of wealth are more likely to have a first mortgage, however the outstanding balance on the mortgages are much lower than investors at higher wealth levels.  Over a third of investors with a net worth of $15 million to $25 million have a first mortgage, with an average outstanding balance of $365,000.  When looking at second mortgages or home equity loans that pattern shifts.  Investors with higher net worth are more likely to have second mortgages or home equity loans.  The outstanding balance on those loans are also higher among those investors with higher levels of net worth.

When thinking of some of the other types of debt, such as credit cards and automobile loans, it is easy for many individuals to think that wealthy investors do not carry that type of debt.  That assumption would be wrong however, as 23 percent of investors with a net worth of $15 million to $25 million have unpaid credit card balances.  The average amount on those credit cards is $110,000.  This is in stark contrast to the 27 percent of investors with a net worth of $100,000 to $499,999 that have credit card debt, however the average amount owed on those credit cards is only $12,000 for those investors.  Automobile loans are held by around a quarter of investors; however, the outstanding balances increase as wealth increases.

A more unusual type of debt is margin loans.  Margin loans allow an investor to borrow against the value of investments they already own.  These loans can be used to purchase more investments but can also be used for non-investment purposes as well.  This allows investors access to cash without having to sell investments.  There can be significant risks to margin loans, such as losses that exceed the original investment, margin calls, or increased losses if the investments used to secure the loan decline in value.  Due to the increased sophistication of these types of loans it is not a surprise that investors at higher levels of wealth are more likely to own this type of debt.

Financial leverage should be one of many topics that are part of a comprehensive financial plan.  It is important for investors of all wealth levels to understand the debt that they are taking on, as well as any potential risks associated.  Investors at all levels of net worth can benefit from a well-constructed leverage plan as part of their overall financial picture.  Financial professionals can provide guidance as to when it is best to take out a loan, or when it is best to just pay for something without taking on any debt.