Middle Class Wealth Building Challenges, Hurdles, Solutions & Options

What a name? Some would say.

Like everything else about this website and Middle Class Wealth Solutions, we intend to challenge conventional wisdom at every turn – especially on issues where it is obvious that the middle class is being taken for a ride.

The wealthy few have a lot of dedicated resources that help them to make money and grow what they have – check out this website (just one example). In particular, check out the various educational articles (note the clarity of language and depth of advice and then compare and contrast with what is broadly available to the middle class) for example,  and this list of advisors (most with minimum net worth requirements that exceed lifetime pretax earnings of most in the middle class). That is just one example in just one country but it is the same all over the world – the rich have access to the best advice and no one is giving similar advice to the middle class because they can’t afford it. Even if the middle class could afford it, the typical personal financial structure (limited assets with wage/salary as principal income source) makes it impossible – at least within the limits of the current laws (which are structured with the needs of the wealthy few in mind) – for these advisors to offer any helpful advice. Sorry folks, the middle class cannot be helped through the current status quo (structures in place) – in order to move ahead financially, the middle class will have to devise its own structures.

We hope that this website can be one good source of similar advice for the middle class as well as provide them access to vehicles that will makeover their personal financial structures in ways that allow the middle class access to the world of benefits (tax breaks, government subsidies and grants, tax deferments and so on) currently available to the wealthy few – from which the middle class is currently locked out. MCWS (Middle Class Wealth Solutions) is about middle class folks identifying middle class financial challenges/hurdles, developing solutions and collaborating together to execute those solutions – in short, financial solutions of the middle class, by the middle class for the middle class.

One other problem we intend to solve is global mobility of capital for the middle class. The wealthy few have many options for deploying their capital globally – and we are not referring to mutual funds or exchange traded funds (ETFs). The middle class on the other hand find it difficult to deploy their capital outside their geographical locations – indeed, the only option available to the middle class in some countries is local bank deposits at rates below inflation. We would not discriminate against middle class folks based on geographical location – anyone, from anywhere in the world would be able to participate in our various (global middle class) collaborative efforts and benefit from our (global middle class) solutions. We intend to start out with global opportunities (using the US Dollar as our principal currency for projects) but as soon as we achieve critical mass in specific countries, we intend to pursue country specific opportunities as well. This will allow North Americans and Europeans (for example), to invest in a location like Botswana (in Batswana Pula [BWP] denominated projects) – there will be foreign exchange risks but if the returns are up to 50% (these are hypothetical numbers but rates of return in less developed countries are higher in line with perceived risk) for example, and some currency hedging is put in place to mitigate potential foreign exchange/currency conversion losses, the investment is viable. Conversely, Bangladeshis or Grenadians interested in a real estate development in Europe or North America would also have an opportunity to participate. Jamaicans, Australians and Kenyans could all be part owners of an oil/gas well in Canada or the United States for example.

Whereas the children of the wealthy elite are raised in the broad and detailed concepts of wealth building and grow up fully expecting to build wealth, the middle class tend to raise their kids with a focus on academic type education (this includes the trades – plumbers, electricians, and more) and getting a good job. In other words, wealth building is not something you’re likely to hear discussed in many middle class families (academic education and jobs on the other hand are more likely to come up over and over).

That is the foundational root cause of  an unending slide in middle class living standards – middle class folks  are disadvantaged from the start. In failing to plan for wealth building from birth, their kids are by default, set on a path of planning to fail at wealth building – especially in a world  increasingly dominated by the  wealthy. More on this in our various blog posts.

The wealthy elite may complain about estate/death/inheritance taxes and its evil effects but rest assured that by the time a wealthy person dies, there usually is very little left in the deceased’s name because of the many options open to wealthy folks during their lifetime to avoid (not evade which is illegal) taxes through estate freezes, intentionally defective grantor trusts, credit shelters or bypass trusts,  Qualified Terminable Interest Property (QTIP) trusts, and more from this article alone. In said article, J.P. Morgan is held up as an example of a wealthy man who may have equated success in wealth accumulation with success in wealth transfer because he lost 69% of his estate to taxes and costs at death, John Galbreath was shown to have lost 65% while Alwin Ernst (Ernst & Young co-founder), William Boeing (Boeing Airplanes), John Rockefeller, Sr.,  and Frederick Vanderbilt are shown as having lost over 50% of their estates to taxes and costs at death. The import of the foregoing is that among the wealthy, it is considered unusual to structure your affairs in such a way that the taxman gets anything significant at the point of death. The foregoing examples focused on US tax law but  be sure that the same loopholes exist in one form or the other all over the world for the wealthy.

The middle class on the other hand, as a matter of necessity, by the nature of their estates (which may consist of a personal residence and marketable securities/bank deposits), inherent disadvantages in the tax laws (written and structured to favour the wealthy few) and sheer ignorance of the entrenched discrimination against them, would be very lucky to achieve similar efficiency in transferring wealth to their heirs (that is if there is even anything of value left to be passed on to the next generation – you can’t pass on a pension, or salary for example).

EXERCISE

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1. How much did your grandparents leave for their heirs (to inherit)?
2. How much can your parents reasonably expect to leave for their heirs (to inherit)?
3. How much can you reasonably expect to leave for your heirs (to inherit)?
4. How much was lost to taxes and costs in the course of the foregoing transfers?
5. What structures (if any) have you put in place to minimize such losses for your heirs?

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We would like to highlight how, in supposedly representative democracies (one person, one vote), the decks are stacked so heavily in favour of one group (few in number who control a lot of the wealth) to the disadvantage of others (who constitute an overwhelming majority), how the aforementioned ‘few’ dictate how much money the ‘many’ make, what investment options are open to the majority, and what governance options are open to them – all in self-serving ways.

To start with, most in the middle class (for ease of reference, let’s refer to this subset [group] as “don’t cares”) do not expect to build wealth, don’t plan for it and so end up not having it. However, there are few in the middle class who appreciate the advantages of building wealth, deny themselves many comforts that those in the preceding group (don’t cares) take for granted to scrimp money for savings and investments only to find out (after significant losses due to circumstances beyond the control of the  middle class) that there are few credible and sustainable wealth building paths open to the middle class. While a lot of money is made everyday in the stock and bond markets, it is sadly not made by the middle class. For every unit of wealth (regardless of currency) created for the middle class, the wealthy make so many multiples over. How?

Well, for one, the markets run in cycles – when the markets are down, the wealthy through private equity funds (usually not broadly, if ever, available to the middle class) convert public companies to private companies at low valuations. Who are the sellers? The mutual funds that manage retirement (and other) savings for the middle class. These companies when taken private, are loaded with debt, restructured (which means the loss of many middle class jobs) and would very likely be sold (reconverted from private to public again) when the markets come back up at high valuations. Who are the buyers? The same mutual funds that manage investments for the middle class. Who controls these mutual funds? The wealthy few. This is just one example (out of many) of why the middle class finds it hard to make any meaningful headway in the stock markets.

When the middle class saves money in the bank, they get paid interest at rates below inflation which in itself amounts to a loss in real terms – but even out of this loss, the taxman gets his full reward (no loopholes, no tax breaks). What do the banks and other financial institutions do with these savings,? Lend them out mainly to the wealthy. What do the wealthy do with the borrowed money? They use it to make more money in highly tax-advantaged ways that are sometimes highly destructive to the middle class (think of leveraged buyouts and other corporate restructurings/reorganizations that result in mass layoffs).

No one is going to broadcast it but you need to pay attention to a common thread in the behaviour of the wealthy few – they do things differently and will never suggest that the rest of the population imitate them. When they encourage the middle class to save (tax-disadvantaged), they are borrowing furiously (tax-advantaged). When they encourage the middle class to buy increasingly larger personal residences at prices they cannot afford on a sustainable basis, they are the ones selling those same houses. So, the property developer puts a project together over a period ranging from 12 – 48 months for a very tidy profit (way above what the middle class can ever earn on a savings deposit) along with tax advantages that most in the middle class don’t even know exist;  on the other side of the table, the middle class folk is buying this personal residence that on average (with a lot of discipline) would take anywhere from 25 – 40 years to pay off. If care is not taken, the middle class Jane would even be encouraged to borrow more (5 or 10 years later) to remodel the personal residence in hopes of increasing the value – a very dubious benefit that may never materialize but the wealthy get to sell a few goods and services in the process. Some would say that the property developer puts his money at risk (the project could fail for any number of reasons) – agreed; but note that even when the project fails, most of the cost of the failure would end up being borne by someone else (sometimes the bank, which may fail and then pass the liability on to the taxpayer through the government run bank insurer).

We are not in any way advocating socialism or redistribution by taking money from the rich to give the poor; we are advocating the end of favoritism and oligarchy. What is good for one should be good for all – if the poor on welfare are considered lazy and unworthy of government support, why should corporations and the wealthy few receive various grants, guarantees, tax deferments and other breaks not generally available to other taxpayers? Ask any accountant or tax lawyer what credible tax avoidance strategies are available to the middle class wage/salary earners and you’ll see that there is really nothing (especially when contrasted with the various breaks available to the capital/ownership class via dividend tax rebates, preferential capital gains tax rates compared with salary/wage tax rates and so on).

Don’t get mad though, get even!

We realize that it would take a lot of time and effort to reverse the status quo (if it can indeed ever be done) – yes, that is how powerful the hold of the few on the governance structures of the day is. So, for a start, we would begin to educate the middle class on wealth building strategies and providing a platform and vehicles to achieve those objectives. We would also seek to educate the middle class on more efficient ways of transferring wealth to the next generation with fewer ‘leaks’ to the taxman. In other words, we would make it possible for the middle class to emulate the wealthy.

Remember though that what ten wealthy folks can achieve with US$1 Million each (or any other currency for that matter – we’ve only used the USD because it is the global reserve currency) would require 10,000 middle class folks with US$1,000 each. You may wonder – how is that different from the mutual funds/unit trusts or even DIY (do-it-yourself) stock market investing? Well, the differences would be like night and day.

If the middle class is ever going to stand a chance, we would need to come together in large numbers – when that is done, there will be  real choices  for the  middle class (not the status quo financial rape and pillaging masquerading as retirement savings).

Instead of being questioned by your mutual fund salesman (most times identified as a financial planner [fee-only financial planners are more trustworthy but are  generally unavailable/unaffordable for middle class folks]) on your risk tolerance parameters, you (Middle Class Joe) would be asking the questions that matter as follows:

1. How much am I putting in?
2. How much can I reasonably expect to receive per year (quarter, month, week or whatever is applicable)?
3. How much can I possibly lose? Under what scenarios?
4. How does this venture make money? If this question is not answered to your satisfaction, you should not be putting your money at risk.
5. In exchange for the risks in question 3 above, how much do I stand to gain?
6. How long will it take for me to get my money back? (In the mutual fund or personal residence scenario, getting your money back would require selling/liquidating the underlying property and sometimes [not always] triggering taxes in the process – the rich get their money back more often than not through refinancing when and where possible plus there are many options to defer  accompanying taxes when they are forced to sell/liquidate)
7. How much accountability is built into the structure? In other words – what are my funds being used for and how easy would it be for me (working in concert with a majority of other co-venturers whose funds are similarly at risk) to fire those ‘running the show’ if they are found to be working against my (or our collective) best interests?

Remember, he who does the questioning is in control. If you are in doubt, watch the TV legal dramas and see the wording of questions to which lawyers ask for a yes or no answer, knowing fully well that either of those answers would create certain mental boundaries in the minds of the listeners. Whether those mental boundaries are a fair reflection of the various possible outcomes is a completely different matter.

So, when your mutual fund salesman/faux financial planner asks questions (as his wealthy employers have asked him to do – remember that the mutual funds salesman is not necessarily evil and may indeed be as much a victim as his clients ) to ascertain whether you are conservative, moderately conservative, moderate, moderately aggressive or aggressive (or whatever other terms are being peddled out there) and then proceeds to build a portfolio from his employer’s list for you around any of those boxes, you’d think that you’ve been very well served (until the next market meltdown or other unfortunate event). Those questions are the wrong questions – it is similar to asking whether you’d like to, in a manner of speaking, be killed financially by gun, or hanging or lethal injection. All the choices are bad – you should be in a position to turn it around and ask whether death is the only option or there are alternative treatments for the underlying condition.

Contrary to popular belief, the fundamentals of wealth building are fairly simple and straight forward – the wealthy few don’t have a monopoly of the know how. What they do (which us middle class folks can equally copy) is to hire the best expertise in the marketplace to achieve the best possible outcomes. Middle class folks tend to get overwhelmed by the various terms and legal jargon used in their dealings with the financial structures (bank savings, mortgage, mutual fund/unit trust, etc) in place, then end up putting their money into suggested instruments just believing that the bank (or other similar institution) can be trusted while hoping for the best.

The rich would never do this – if their money is going to be at risk, they would insist on understanding why and what they expect in return. If a legal agreement is difficult to understand, they would hire a lawyer to translate it into plain, conversational everyday type English (or whatever other language they understand). More often than not, they are equally out of depth with some of the tasks they have at hand – they compensate by hiring the best talent available. That was why the Wall Street investment banks (who ordinarily hire Finance MBAs from Ivy League schools) went out to hire Math PhDs to program complex algorithms for (among other things) the purposes of creating complex financial instruments in the last 10 – 20 years most of which turned out to be financial weapons of mass destruction (of jobs, life savings, hopes and dreams). So, if you think it is difficult to achieve these common sense goals, it is not.

What is more difficult is getting middle class folks to come together in sufficient numbers to achieve for the middle class, what the wealthy few have achieved for themselves. Why? The average middle class folk is more likely to trust the (status quo) structures of the wealthy  – many of which, unfortunately, are designed to  impoverish the middle class (at least in real terms). Always remember that more often than not, if the wealthy few are urging you to travel north, they are actually heading south – we intend to show you exactly what they do as well as make it possible for you to do the same thing. If you believe it is time for the middle class to use its resources to help itself, then come along for the ride because we think it is going to be very interesting and lots of fun.