It may not be immediately obvious — much like wealth itself — but advisors who deal with high-income individuals and their families can greatly boost their usefulness to those clients by becoming sensitive to the clients’ consumption styles.

That doesn’t mean finding out whether they prefer a Porsche to a BMW. Rather, you need to know what percentage of their incomes they usually spend and how those spending habits are likely to affect their long-term financial health. And there is no better way to find out what their money means to them than by asking them.

Of course, it’s important to keep in mind that income and high net worth may be very different. (See page 16.) The high-income earners may have very different consumptions styles than high net-worth individuals who could have incomes on the low side.

“There are a whole lot of people who earn a lot of money who aren’t very wealthy because they spend as much as they earn,” says Keith Sjogren, director of strategy consulting for research firm Investor Economics Inc. in Toronto. “You’d think people earning $750,000 a year would build up a portfolio quite quickly. But if you are spending it on cottage properties, you have a jumbo mortgage, you fly first-class and your wife can hardly lift up her arms for the jewellery, you’re not going to have a lot left over.”

For some clients, in fact, it may be necessary to illustrate clearly how spending patterns are standing in the way of wealth accumulation. Those who spend a high percentage of their available income, in particular, may not be aware of the long-term consequences for building their overall wealth and, by implication, the lifestyles they wish for themselves and their families.

Surfaces can be deceptive, and no more so than in this area. For many of the conservative-spending wealthy, not broadcasting their financial status is an art at which they excel. Advisors, then, need to be aware of the spending habits of their wealthy clients and avoid being swayed by appearances.

When it comes to that assessment, it’s sometimes useful to take notice of what your clients are spending money on. Typically, more conservative spenders will place value over image, such as passing up expensive logo-laden fashion in favour of high-quality gear that doesn’t sing out its name but lasts over several seasons.

According to Cynthia Pickering, founder of Time is Money Executive Concierge Inc. in Calgary, this emphasis on value over bling can make the quietly wealthy difficult to spot at first glance. “You wouldn’t know it if you saw them on the street,” she says.

So, if one of your quietly wealthy clients isn’t advertising his or her wealth by making flashy purchases, take the direct approach: sit down with the client and talk about what is important to him or her.

When it comes to the answers, it would be a mistake to assume that there are only two standard types: spenders and savers. The wealthy, after all, are looking for highly individualized service and are likely to resist being pigeonholed as one thing or another. It’s important to refine the picture; the aim is not to alter personalities but to help your clients achieve their goals with respect to the balance between lifestyle and wealth accumulation.

The central problem is that too much spending can put enthusiastic consumers at serious risk. Consider that the annual consumption rate of conservative spenders tends to be 2%-4% of their net worth, in line with inflation for the general population. The burn rate of the flashy wealthy family or individual is somewhere in the 6%-12% range.

“The bottom line is that if somebody is consuming between 6%-12% of his or her capital and investments earn 5%-8%, guess what? That person is dipping into capital,” says Thane Stenner, managing director of Stenner Investment Partners, which is affiliated with GMP Private Client LP in Vancouver.

Making that equation plain is one of the ways in which advisors can improve the long-term outlook for the excessive spenders. Unfortunately, advisors often fail to do so. “Advisors tend to overlook the importance of cash-flow management,” says Sjogren, “in favour of asset management.”

But many wealthy Canadians need advice about their spending habits. He recommends advi-sors ask for a client’s tax return as a simple way to begin the business of understanding their income and spending habits.

@page_break@Stenner suggests drawing the connection between disciplined spending and continued enjoyment of the clients’ passions, be they wine, cars or travel. That way clients will take the lesson to heart, he says: “You have to draw a link to whatever you’re doing for them back to their consumption.” IE