The Everlasting Concentration of Wealth: Lessons from History and Modern Financial Systems

Throughout history, a striking pattern has persisted: the vast majority of wealth is controlled by a small minority. Whether in ancient Egypt under the rule of Pharaoh Ramesses or in today’s modern world, this unequal distribution of wealth has remained a constant. The mechanisms may have evolved, but the outcomes are strikingly similar. The wealthy continue to maintain their financial dominance, not because of ancient methods of control, but because they have mastered the art of money management in ways that most people have not.

The Wealth Retention Phenomenon

I once had a conversation with my late uncle, a successful and wealthy man, which left a lasting impression on me. He said, “If you took all the money in the world off the rich people and gave it to the poor people, the rich people would have it back in five years.” What he meant was that rich people understand money: they know how to invest it, how to secure their investments, and how to grow their wealth over time. This knowledge sets them apart from the rest of society, who often lack this financial acumen.

This divide in financial knowledge has led to the creation of a massive financial industry. However, this industry is not designed to level the playing field. Instead, it operates on a one-size-fits-all model, which serves the average person reasonably well but fails those who fall outside of this category—particularly those with higher incomes.

The Flawed Financial System for High Earners

To illustrate this point, let’s look at the Irish old age pension system. The maximum pension anyone in Ireland can qualify for is just under €14,000 a year. For someone earning the average income of €44,000 a year, this pension represents about 35% of their income, a relatively fair deal. However, as income increases, the fairness of this system decreases.

For example, someone earning €100,000 a year contributes significantly more to the pension system—24 times more than the average earner—yet their pension only replaces 25% of their income. Those earning €200,000 a year face an even starker disparity, contributing 48 times more than the average earner but receiving a pension that equates to just 15% of their income. This demonstrates that while the system may work for Mr. Average, it is far less favorable for higher earners.

Bias in Financial Advice

Another major issue within the financial system is the bias inherent in financial advice. In Ireland, financial advisors are often more akin to salespeople. They are paid by financial institutions, like Irish Life, to sell products rather than to provide truly independent advice. This creates a conflict of interest, where the advice given is often skewed towards selling a product rather than serving the best interests of the client.

In contrast, the UK offers a different model with Independent Financial Advisors (IFAs), who must act in the best interest of their clients. They are prohibited from taking commissions on product sales, ensuring that their advice is impartial. Unfortunately, in Ireland, even so-called independent financial advisors are often just licensed salespeople.

The Pitfalls of Fragmented Advice and Tax Overpayment

The financial challenges for high earners don’t stop with biased advice. Many individuals receive fragmented advice from different professionals who rarely communicate with one another. For instance, a person might have a financial advisor, an accountant, and a solicitor, each handling different aspects of their financial life without any coordination. This lack of communication can lead to a disjointed financial strategy, much like an orchestra where each musician plays a different tune without a conductor to bring them into harmony.

Moreover, many people overpay their taxes simply because they are unaware of the concessions and benefits available to them. The Irish Revenue has reported that taxpayers fail to claim around €500 million annually in tax concessions. If these unclaimed funds were invested over the course of a 40-year career, they could amount to about €250,000 in additional wealth.

There’s also a common misconception that accountants are there to help you save on taxes. In reality, their primary obligation is to the revenue authorities, not to minimizing your tax bill. This misunderstanding further contributes to the issue of overpaid taxes and missed opportunities for wealth accumulation.

The Importance of a Financial Plan

One of the most significant obstacles to achieving financial success is the lack of a comprehensive financial plan. Financial freedom—defined as having enough assets to generate the income needed to sustain your lifestyle without working—should be the ultimate goal. However, achieving this requires more than just a vague desire to be wealthy; it requires a specific plan.

Determining your financial freedom number, the amount of wealth you need to achieve this goal, is the first step. Once you have this target, you can map out a route to reach it, much like planning a journey with clear destinations along the way. Research shows that those with a personal financial plan accumulate twice as much wealth by retirement as those without one. The simple act of writing down your goals and plans significantly increases the likelihood of achieving them.

Conclusion: Tailoring the System to Your Needs

The current financial system is built to serve Mr. Average, but for those who earn more than the average income, this system is inadequate. The biases in financial advice, the fragmented nature of professional advice, the overpayment of taxes, and the lack of a clear financial plan all contribute to the challenges faced by high earners.

The solution lies in addressing these issues head-on. While it is possible to manage these aspects on your own, the complexities of modern finance often make it more efficient to work with a top-class financial planner. A skilled planner can help you navigate the system, tailor your financial strategy to your specific needs, and ultimately help you achieve financial freedom.

Ask About Wealth exists to empower you with the knowledge and tools needed to make better financial decisions. Through education, informed questioning, and strategic planning, you can take control of your financial future and ensure that the system works for you, not against you.

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