For years, the ‘richer getting richer’ mantra has reechoed the widening gap between the rich and poor, and the inequality that the concept has been birthing.

Over the years, education, business and economic policies designed to bridge the economic inequality gap have failed, fueling the concern about why the rich keep getting richer and the poor poorer.

The International Monetary Fund (IMF) delved into the mechanism of wealth and analyzed the concept of riches to provide an answer to the puzzling question.

Wealth begets wealth. This simple concept of privilege has added to growing discontent with inequality that has escalated under the shadow of the COVID-19 pandemic.

A paper co-authored this year by economists from the IMF and other institutions confirms that wealthier people are more likely to earn higher returns on their investments. It also shows that the children of wealthy people, while likely to inherit that wealth, aren’t necessarily going to make the same high returns on investments.

Detailed data on wealth are extremely rare, but 12-years of tax records (2004-2015) from Norway have opened a new window into wealth accumulation for individuals and their offspring. The Nordic country has a wealth tax that requires assets to be reported by employers, banks and other third parties in order to reduce errors from self-reporting. The data, which are made public under certain conditions, also make it possible to match parents with their children.

The data show that an individual in the 75th percentile of wealth distribution who invested $1 in 2004 would have yielded $1.50 by the end of 2015—a return of 50 percent. A person in the top 0.1 percent would have yielded $2.40 on the same invested dollar—a return of 140 percent.

Another significant finding: High returns both bring individuals to the top of the wealth scale and prevent them from leaving it. Controlling for age, parental background and earnings, moving from the 10th percentile to 90th percentile of wealth distribution increases the probability of making it to the top 1 percent by 1.2 percentage points compared to an average probability of 0.89 percent.

Why do rich people earn high returns? Conventional wisdom suggests that richer individuals put more of their assets toward high risk investments, which can result in higher returns. But our research finds that wealthy people often earn a higher return even on more conservative investments. Richer individuals enjoy pure “returns to scale” to their wealth.

Specifically, for given portfolio allocation, individuals who are wealthier are more likely to get higher risk-adjusted returns, possibly because they have access to exclusive investment opportunities or better wealth managers. Financial sophistication, financial information, and entrepreneurial talent are also important. These characteristics make the returns to wealth persistent over time. This research is the first to quantify this mechanism and show that it is likely to matter empirically.

Do high returns persist across generations? The answer is a qualified yes. Wealth has a high degree of intergenerational correlation, but there are important differences in how returns to wealth accrue across generations.

The children of the richest are likely to be very rich, but unlikely to get as high returns from this wealth as their parents did. This suggests that while money is perfectly inheritable, exceptional talent is not.

I just accepted to deliver a speech in Silicon Valley on “Fintechnolization: The One Oasis of Digital Platforms”. A venture capital firm here read my postulation that the steady state of all digital platforms is fintechnolization. In other words, most digital platforms will offer a type of financial services (read fintech) since fintech delivers a relatively higher value, compared with other sectors, and with demand already within the platforms, executing the playbooks may not be hard. It would be a great talk as I connect the framework to the One Oasis Strategy. 

I made a big fintech speech (not on the same topic) in Kampala Uganda where I was  honoured by the tech community therein. That was in Oct 2019, and it seems like an eternity when you look at what covid-19 has done to accelerate the redesign of digitizing financial services.

No worries Members, I am updating my courseware and adding many things including fintechnolization in Tekedia Mini-MBA. So, while this talk is not going to be public, in  our class, we will attain a steady state knowledge equilibrium within the nexus. We just have to wait for Feb 8 to come.

Click to register for Tekedia Mini-MBA (Feb 8 – May 3, 2021): online, self-paced, $140 (or N50,000 naira). Full curriculum here – and early bird ends soon.

For companies sending a minimum required staff, my availability is now open for scheduling in your event, meeting, board meeting, etc. Get in touch with Admin to block the date.

I had a great one with a Lagos firm this morning, sharing and answering questions with the team. 2021 is the year of accelerated growth; let’s make it amazing. Join us at Tekedia Institute.

Tekedia Mini-MBA Edition 4