The Liabilities of Wealthy Investors

3/1/2020

Wealthy investors can often buy whatever they want. However, for reasons which may be related to tax advantages and forward-thinking asset management, they don’t always pay off their loans and liabilities when they can do so.

Spectrem’s study Portfolio Trends, Expenditures and Perceptions of Providers includes detailed information on the average portfolio allotments of investors from all levels of wealth, age, occupation and advisor dependency. It also includes information on the loans and financial liabilities those investors still hold.
For investors, it is interesting to see upon which side of the liabilities fence they sit in comparison to other investors of a similar wealth level. Do you maintain everyday financial liabilities like credit card balances and automobile loans which you could reasonably pay off? If so, are you maintaining those liability levels on the advice of your accountant or financial advisor?
Each investor has different reasons for maintaining financial liabilities when they have the cash to pay off their loans and credit debts. Investors should discuss with their advisor the viability of maintaining financial liabilities instead of paying off those debts, or the advantages that could be realized by paying off those loans in order to have greater flexibility for investing in future years.
From an overall point of view, among all investors with a net worth ranging from $100,000 to $25 million, 38 percent maintain a first mortgage, and 26 percent hold automobile loans. At the same time, 24 percent of all investors have credit card balances, and 13 percent have second mortgage or outstanding loans from a home equity loan.
Each investor is different. There are tax advantages to holding mortgages. Again, investors need to address their financial liability situation with their advisors to determine if their decision to maintain the liabilities makes sense for their financial situation.
The Spectrem study proves the obvious, that the wealthier the investor, the less likely they are to hold standard debt such as mortgages, automobile loans and credit card balances. However, among those investors with a net worth between $10 million and $15 million, 29 percent still hold first mortgages and 13 percent are paying off a second mortgage.
At the same time, 18 percent of those wealthy investors have an average credit card balance of $94,000 and 19 percent own an average of $95,000 on automobile loans. Based on an unfiltered examination of net worth versus liability level, it seems those balances could be paid off and those liabilities erased from their balance sheet.
Just as wealth determines liability concerns, so does age. The older the investor, the less likely they are to have outstanding debt. However, among investors from the World War II era, 20 percent still have first mortgages to pay off, and approximately 15 percent are holding on to credit card balances and automobile loan liabilities.
Beyond portfolio descriptions and details, the Spectrem study Portfolio Trends, Expenditures and Perceptions of Providers examines investors and their perceptions of the nation’s most popular financial providers and includes a look at how investors spend their money as well.