Canada’s high net worth population is booming driven by retiring baby boomers that are cashing up businesses or assets built up over the past 30 years. Marina Daras finds that offshore investors, who traditionally may have had their assets in the UK and Switzerland, are increasingly turning to Canada’s safety and security.
Thanks to tight regulations, a high rate of banks’ capitalisation and a strong supervisory track record, the Canadian banking system is ranked amongst the soundest in the world. Having resisted the global financial crisis well, it has become a very attractive market for wealthy investors and a prolific land for wealth creation. A model of competitiveness and resilience in times of adversity, Canada is fast becoming a haven for international high net worth investors
(HNWIs), including those from Asia, Europe and some Middle-Eastern countries.
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After experiencing a series of bank’s failures in the 1980s and a serious downgrade of its economy in the 1990s, Canada learned from its mistakes and reshaped its financial system into a more sustainable and safe structure. Although the 2008-09 financial crises slowed own the country’s economy, Canada has proven the efficiency of its regulations and remains a strong and resilient market.
This has meant buoyant growth for the ranks of Canadian HNWIs. In 2012, Canada was home to more than 422,000 high net worth individuals with $1.53trn, according to global wealth consultancy WeathInsight. Over the past five years, wealthy Canadians outperformed the worldwide average with the number of Canadian HNWIs rising by 1.8% while the worldwide volume decreased by 0.3%.
A promising sector
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By GlobalDataExperts, private bankers, consultancy firms, although they disagree with each another on the percentage rate of the growth, all agree that the volume in HNWIs in Canada will blow up in the coming years.
"We hear from a number of reports that in the next eight years, the number of Canadian millionaires will double," says Eric Bujold, president of Private Wealth 1859, part of National Bank. "Thanks to the economic growth, there are more and more entrepreneurs who sell their businesses and become wealthy," he says.
Thane Stenner is a portfolio manager and director of the wealth management division at Stenner Investment Partners, a multi-family office with CAD$15bn in assets under management. He is positive that the HNW market will continue to grow, but he thinks a doubling over eight years is a bit optimistic: "Canadian household debt levels are at all time highs: this will slow growth in Canadian economy, which will slow growth for everybody, even HNWIs. Interest rates will also be rising over the next 5-10 years, which will slow real estate growth significantly, and business valuations could be the bright light and gradually improve more from here."
Immigrants to wealth
As the number of Canadian HNWs is expected to keep on growing in the coming years, private banks have recently changed their strategy to adapt to new challenges.
Among those wealthy Canadians, a large part of them – between 25 to 35% – are entrepreneurs who started their businesses in the 1970-80s and who are going or are about to go through liquidity events by selling their businesses or passing their shares down to the next generation. Another large segment is made of executives who earned their wealth through highly paid positions and own heavily concentrated portfolios.
Most of those rich individuals belong to the baby-boom generation and are either self-made entrepreneurs, or they are the first generation in their family to accumulate such wealth. They are what private bankers call ‘immigrants to wealth’.
"Ten years ago, those baby-boomers were in their 50s and their children were just finishing university or getting married. Today, they are in their 60s and they have two options: transferring their wealth to their children or preparing their portfolio for liquidating their assets," clarifies Tony Maiorino, vice-president and head of RBC Wealth Management Services based in Toronto.
"Business owners are thinking again about an exit strategy, which they might have put on hold for the last five years," says Yannick Archambault, vice-president and managing director of BMO Harris Private Banking.
As entrepreneurs are contemplating retirement options and asset liquidation, the private banking sector has been widening its services to adapt to the challenges faced by the new riches. "From a high net worth perspective, clients have gone from wealth accumulation to wealth preservation or transliquification," Maiorino says.
Shifting towards comprehensive wealth planning
Demographics, the intergenerational transfer of wealth and domestic growth prospects are seen as the key factors of growth, for both the HNW and ultra-HNW (HNW) markets. But in order to better suit their clients’ expectations, private banks and family offices widened their offer to give them access to a full range of wealth advisory services.
"Our clients are aware of their needs; they just want an extra bit of help and support," observes Eric Bujold from Private Wealth 1859.
"We do private banking but we also do investment management, investment advisory and we do a lot of financial planning, wealth advisory and estates trust. We also run family offices. The whole planning piece is where we put a lot of emphasis over the past few years. We have also been establishing partnerships with law and accounting firms," says BMO’s Archambault.
And contrary to Europe where some wealthy families have been passing their wealth down for centuries, only a handful of Canadian families have been handing their wealth over the second or third generations.
To help their clients through this new stage of their lives, private banks have moved closer to a multi-family office setup type, although family offices remain a relatively new concept in Canada.
"Ten years ago, there was not as much planning as today," says Maiorino. As the head of RBC Wealth Management Services, Tony Maiorino has seen his industry moving towards what he calls a "more comprehensive wealth planning". His team organises 8,000 meetings with clients a year, mainly focussing on wealth planning. "Ten years ago, this team was only 20-25 people, now, we are almost 200."
With 15% of the actual market share and more than CAD$353 billion of assets under management, the bulk of the Canadian wealth is managed by RBC WM. The bank occupies the top of the "Big Six" ranking and hopes to reach 25% of the market share by 2020.
The great purpose of wealth
But as money is making its way down to the next generation to be reinvested, philanthropy appears as an option to a lot of HNWIs. Inspired by wealthy celebrities, the "giving back to society" factor plays an important role in the wealth planning.
"As they think about retirement, we ask our clients some thought-provoking questions such as: What does retirement look like for you? What is the purpose of your wealth?" tells Yannick Archambault.
At BMO Harris Private Banking, Archambault has noticed his clients moving away from writing checks on a yearly basis to actually investing their time and money into philanthropic causes. "They want to be active longer and we are helping them with that. It is difficult for a family that has less than CAD$5m because this will be working towards retirement and the children or grandchildren. But a family with more than CAD$5m, we can help them building a foundation. We have a group in Toronto, working across 33 offices in Canada, which specialises in establishing foundations," he says.
Among the new hires in the wealth sector, experts in philanthropic investments or in the establishment of foundations and charities recently joined the flow of lawyers and accountants to meet the demand for a more ethical investment solution.
Money seeks safety
Canada has proved itself to be an attractive market for international investors. Seen as a safe and secure country, Canada has been attracting funds from Asia, Europe and some Middle-Eastern countries.
A lot of capital is coming from international markets to Canada driven by macro-factors including its very strong banking system, its politically stable government and its rising currency versus the US dollar and the Euro.
"We notice more and more interest in Canada. Europeans used to considered
Switzerland or the US but now, since the crisis, the Canadian market appears as one of the most secure places in the world," observes Eric Bujold from National Bank.
At BMO, Yannick Archambault has been working closely with Europeans looking to invest in the North American market.
"Following the elections in France, a lot of French citizens, a little concerned about the eventuality of a 75% taxation rate are looking at Canada from a tax planning and estates perspective. We have been working with those families in helping them structure a Canadian set up for part of their assets," explains Archambault. "We are also benefiting from the on-going unrest in the Middle-East with a lot of Middle-Eastern capital looking to exit that region and to open a Canadian division for their business. It is a strategic approach to the US market."
The other way around, Canadians are investing an increasing amount abroad. Although home-market bias still persists with about 50% of portfolios invested in Canada, and 25% in the US market, international investments represent about 25% of Canadian client portfolios. The Asia-Pacific region has also attracted private banks around the globe, including the big national Canadian banks.
"Being able to offer a broader spectrum of investments is part of the evolution of the private banking industry, but it is also partly linked to being able to appeal and attract Asian, European or Middle-Eastern capital," argues Archambault.
He depicts the investment strategy centred on the Asia-Pacific region as the ultimate factor of growth. "There is much more business being done with Asia than ever in the past," he comments.
BMO was not the first and will not be the last to open two offices in Asia, one in Hong Kong and one in Singapore. "We also have a partnership with the Agricultural Bank of China. Asian investors are looking to Canada for opportunities: we call it the ‘New Canadian segment’," reveals Archambault.
RBC also has its emerging markets unit in Asia, headed by Barend Janssens, focused on new high net worth clients in Asia, EMEA and Latin America.
Gold standard reputation
While the global private banking industry is adjusting its regulatory guidelines, Canadian private banks don’t have to worry too much. RBC’s Maiorino says that of course, they have to deal with anti-money laundering regulations and with the Foreign Account Tax Compliance Act and "all of these regulatory rules or bodies occupy an important position in our future planning." But as Canada is far ahead in terms of implementing regulations, changes won’t be too drastic, he argues.
Canada has already achieved a proven reputation in its banking system and as traditional offshore centres, like Switzerland, are engaged in a fight against bank secrecy and tax evasion, its wealth sector could suffer a lack of competitiveness to compete with a flourishing and highly attractive Canada.
