More than 50% of wealthy’s money is in illiquid assets

To many financial advisers, Jurii Maniichuk is just another middle-class investor, barely worth the ink it would take to sign him up as a client. His savings are modest and his spending even more so.

“I’m not stingy,” says the 46-year-old, who immigrated to the United States in 1989 from Ukraine. “But if everybody in America spent money like me, the economy would be in serious trouble.”

Mr. Maniichuk does own one asset that sets him apart, however: a collection of Ukrainian paintings worth more than $1 million.

Meet the elusive face of hidden wealth. As advisers scramble to get their hands on money held in bank, brokerage or mutual fund accounts, many are overlooking a bigger part of the wealth market: illiquid assets.

A survey of 1997 IRS filings found that 56.3% of assets held by filers with a net worth of between $600,000 and $1 million was illiquid. Of the $14.5 trillion in assets held last year by U.S. households that had an annual income of at least $100,000 and/or a net worth of at least $500,000, 49% was held in liquid investments. The rest, or $7.4 trillion, was held in illiquid assets, according to Spectrem Group, a Chicago research company.

Loosely defined as any asset that cannot easily be converted to cash, illiquid assets take many forms. Art, real estate, stock options and stakes in privately held businesses or limited partnerships are all considered illiquid. So is money held in 401(k)s and other retirement plans.

“The vast majority of wealth is in illiquid assets,” says John A. Benevides, managing director of VIP Forum, a research company in Washington. “An adviser’s ability to succeed in the [high-net-worth] market rests upon his or her ability to manage illiquid assets.”

role for advisers

Investment advisers who help clients manage and monetize their illiquid assets are also likely to attract liquid assets. That’s because clients who come to an adviser with illiquid assets usually keep those assets with the adviser after they are liquefied. But that is also because the advisers are likely to win that client’s trust.

“We have a number of accounts that started out years ago with a lot of illiquid assets,” says L. Mark Fingerlin, senior vice president and trust division manager of Montecito Bank and Trust in Santa Barbara, Calif. “Today, they look like any other account with substantial assets.”

Why, then, do many advisers overlook illiquid assets? The answer is money. Unlike assets held in a brokerage account, a client’s Renoir or 401(k) assets generate zilch in fees or commissions for advisers.

Robert Glovsky, president of Mintz Levin Financial Advisors LLC in Boston, which oversees $600 million in assets, concedes that giving advice about illiquid assets isn’t necessarily something an adviser can charge for.

Still, “a planner that only looks at liquid assets and refuses to help with the other assets is not doing the best job for the client,” he says.

Managing illiquid assets can also be a tremendous headache: downright complicated and confusing.

Ask many advisers whether it’s better to sell a $500,000 painting to a private collector or donate it to charity, and you’re likely to be met by a blank stare, says Laurence Zale, an art adviser in New York.

“Because financial advisers are not trained in the world of art, they tend to stay away from it,” he says. “They will ask the question, but they tend not to be diligent about finding out the true value of their client’s art holding.”

Too bad – they may be missing out. Experts say the market for illiquid wealth represents an untapped reserve of assets. Advisers who learn how to identify and manage such assets stand to make a killing.

In 1998, 2.9 million U.S. households had at least $1 million in liquid assets. Adding illiquid assets to the equation, the number of households was more than double that amount. There were 6.7 million with a net worth of at least $1 million, says Spectrem.

Even more telling, the number of households with at least $1 million in both liquid and illiquid assets climbed 35.7% in 1998. The number of households with $1 million in liquid assets, meanwhile, climbed 16%, according to Spectrem.

wealth in options

A good portion of the illiquid wealth was created by the vastly increased use of stock options as compensation over the past decade. Today, about 14.1 million Americans hold stock options, up from 1 million a decade ago.

The value of those options is estimated to be about $522 billion, according to OptionWeath Inc., a Rockville, Md., maker of software that helps advisers manage stock options.

The value of options that were authorized, as a percentage of total U.S. household holdings of individual stocks, had risen to 17.4% by 1997, from 6.8% in 1989, according to a study by Sanford Bernstein Research. Translation: About one in every six dollars of household stock holdings was in the form of stock options in 1997.

So how do advisers go about getting their hands on illiquid assets? Perseverance. Identifying clients with illiquid assets isn’t easy. It requires that advisers dig deeply into a potential clients’ holdings and ask questions beyond the usual, “How much money is in your brokerage account?”

It also requires that they rethink their definition of the ideal client.

“It’s all about relationships,” says Rick Shultz, chief executive of OptionWealth.

“I am not saying advisers should be prospecting poor people. But they should be prospecting people who at least have a high probability of becoming rich.”

The key is to identify those clients before everybody else does. “If you wait until I cash in my stock options, you will instantly know I am wealthy,” says the VIP Forum’s Mr. Benevides. “But so will every single one of your competitors.”