As in most developed countries, wealth in Canada is heavily concentrated. The affluent investor, who is typically defined as having more than $500,000 in investable assets, represents only nine per cent of households in the country but controls 80 per cent of the estimated $3.6 trillion in assets, according to a report by Investor Economics
The report says that mid-tier HNW investors – those with $500,000 to $1 million in investable assets – are a growing segment of the wealthy whose asset base is expected to grow to $1 trillion by 2024 from $536 billion in 2014.
Why is this segment of HNW investors growing?
“The Baby Boomers are moving into that category,” says Sam Febbraro, executive vice-president at Investment Planning Counsel and author of a report on the Canadian HNW market. “They have had a life of asset accumulation, many are still active taking on second careers and have come into sudden money through inheritances or by selling their businesses and/or properties.”
As the Boomers turn their assets into cash they are looking for security rather than risk and want to generate a good income from what they’ve been able to accumulate over the years to provide a good retirement, preserve their wealth and pass it on to future generations.
This segment of the HNW market has special financial planning needs which often have been overlooked in the past by the major banks, which tend to focus on HNW clients with $1 million or more in investable assets, leaving an opportunity for smaller, independent advisers to jump into this market, Febbrano says.
The 2017 year poses some financial risks for virtually everyone regardless of the size of their portfolios.
“There is an aging demographic and people are living longer,” Febbraro says.
“Yields are low, which makes it’s more difficult to get a good income when de-cumulating assets, and there’s a lot of uncertainty with Brexit (Britain’s exit from the European Union), the results of the U.S. election, free trade, and Canadian taxation policies and the impact these things will have on the economy and financial markets.”
Investors need to consider three things in the face of market declines and negative returns – the depth of the decline, its duration and the frequency of the declines. These things can have devastating consequences to a retirement portfolio and decumulation strategy.
As well, they need to determine the timeline of their portfolio (short, medium or long-term), their investment style (growth or safety), level of risk tolerance, asset allocation, geographic preferences, and the ability to reposition their investments to shift with changing economic conditions.
“All these things should be in an investment policy statement that outlines who does what, portfolio objectives, fees and a general statement of understanding,” Febbraro says.
HNW investors increasingly are embracing the concept of a financial adviser who works as the family’s Chief Financial Officer.
“Coupled with risk management and capital preservation is the goal to transfer wealth from one generation to the next,” Febbraro writes in his report.
“Instead of working exclusively with mom and/or dad it now is a basic requirement to consider the extended family – grandma and grandpa along with daughters and sons. Hosting family meetings is one way to navigate this new dynamic and develop inter-generational strategies to accommodate and satisfy mom and dad’s wishes, assess tax considerations and manage potential family relations and frictions.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.