Luxury cars, glittering jewels and cozy cottages build a formidable illusion of wealth. But these hallmarks of conspicuous consumption don’t always add up to high net worth. This harsh reality jolts many possession-rich and cash-poor folks when their advisors tally assets against liabilities, and reach grim conclusions about future cash flows.

“People tend to assign arbitrary numbers to illiquid assets, and believe they’re worth a lot,” says Calgary based Nicholas Miazek, manager of financial planning at T.E. Wealth. When drawing up a net-worth statement, he makes a point of dividing the two and showing people what they can actually spend.

If clients won’t liquidate assets like primary residences or cottages, Miazek takes them off the table when making net-worth determinations, and helps them plan for alternative sources of income.

Some advisors assume clients will liquidate their properties halfway into retirement, downsize, and invest the resulting cash, “but most people aren’t inclined to move down the property ladder,” says Miazek. “If they’re selling a $500,000 home in the suburbs, they’re most likely buying a half-million dollar condo downtown.”

Elizabeth Summers, CFP, FMA, FCSI, a financial planner at TD Waterhouse in Victoria, B.C., prefers to account for real-estate assets on net-worth statements, because that’s where average Canadians are most heavily invested. “After all, a client with $5,000 in the bank and an $800,000 home—fully paid off—has much more net worth than a client with just $5,000 in the bank,” she says. “If needed, he or she could sell the home to meet retirement needs, or take out a home-equity line of credit.”

A net-worth statement that includes all liquid and illiquid assets serves another important purpose for Summers’ older clients. “It’s a very accessible source of information for their executors. If you don’t have details of your home in there, executors won’t know whether they have a mortgage that needs to be discharged.”

David Chucko, partner at PwC in B.C., breaks real estate into two categories when determining net worth. “Consumption real estate is one where you write a cheque to own it; investment real estate is one where someone else writes you a cheque to own it.”

While investment properties generate cash flow, personal-use properties often end up as a legacy for the next generation. For that reason, Chucko advises clients to buy only what they can comfortably afford, and not lock too much money into illiquid investments.

Money mirage

In addition to real estate, RRSPs constitute a large chunk of average clients’ technical net worth. But Dessa Kaspardlov, CEO of KL&A, Financial Planning Consultants in Windsor, Ont., cautions against weighting them too heavily on networth statements. “RRSPs aren’t a savings or chequing account you can draw upon at will,” she says.

Many clients also have a lot of net worth concentrated in their employer’s stock options or purchase plans, pension plans, or group RRSPs. “From an investment perspective, that’s a very high concentration of risk,” Miazek says. “A natural disaster, regulatory or legal change, or other unknown variable could quickly impact this portion of the pie.”