A gold standard reputation, socioeconomic stability and liberal immigration policy are attracting a significant amount of international wealth into Canada. The country is also experiencing a boom in its domestic wealthy numbers, giving private banks ample opportunities to prosper. John Schaffer identifies the big trends dominating the wealth management market in the region and examines why Canada is the new wealth haven to watch
There are many things going right for Canada. The country’s political landscape has experienced an upswing with high hopes being pinned on new Prime Minister Justin Trudeau and his cabinet. The country’s economic climate is following a positive trajectory as well.
A high rate of banks’ capitalisation, tight regulations and a resilient track record have allowed the Canadian banking system to be deemed as one of the soundest globally. Even though the 2008-09 financial crises slowed down its economy, Canada has become a land for prolific wealth creation and an attractive market for wealthy investors.
Canada’s domestic wealthy population has consistently experienced a buoyant growth and, according to Capgemini’s World Wealth Report 2015, Canada had a high net worth individual (HNWI) population of 320,000 in 2014 – up 4% from the previous year. This growth is largely being driven by retiring baby boomers that are cashing up businesses or assets built up over the past 30 years.
Even though it pales in comparison to its United States neighbour – the largest wealth market with a population of over 4 million HNWIs – Canada, with the eighth largest population of HNWIs globally, offers increasingly interesting opportunities that are making it a prominent destination on the global wealth map.
Canada – the new Switzerland?
A flow of international wealth into Canada is creating ample opportunities for the private banking industry in the country.
A lot of new wealth is entering the country through global immigration, with wealthy individuals coming in particularly from China, Iranand Russia. These offshore investors, who traditionally may have had their assets in the UK and Switzerland, are increasingly turning to Canada’s safety and security.
Canada has a relatively liberal immigration policy paired with political and economic stability, which makes it a prosperous environment for the international wealthy. Raj Kothari, Managing Partner, Greater Toronto, National Asset & Wealth Management Leader at PwC, reiterates that although the size of Canada’s wealth management industry trails behind more mature markets, the characteristically neutral environment is undoubtedly attractive.
Canada does not hold the same negative connotations that traditional wealth havens such as Switzerland are trying to shake off, with banking secrecy and tax evasion having become top-of-mind issues for regulators, private banks and wealthy clients. This gives Canada a competitive edge.
One regulatory constraint that has squeezed Canadian institutions, perhaps more than other jurisdictions, is the cost of implementing Foreign Account Tax Compliance Act (FATCA) as there are several Canadians who hold dual nationality with the US.
The impact of all the new wealth has been prominent in Canada’s real estate sector, causing significant property valuations in the two major metropolitans – Toronto and Vancouver.
Big banks rule the private banking sector
The wealth management market in Canada is dominated by the large, domestic Canadian banks.
Royal Bank of Canada (RBC) Wealth Management has the largest share of the wealth management market, with 20% of the HNWI market share, and holds CA$300bn in assets under administration.
The rest of the "big six" banks – TD Bank, Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), Scotiabank, National Bank of Canada (NBC) – have significant private banking operations, leaving little room for smaller wealth managers.
Private banking is a lucrative business for Canadian banks, as it is rooted in fee-based revenue. Kothari says: "The major Canadian banks have made it a priority to concentrate on wealth management, aiming for 25% of their income to be coming from it."
Canada’s private banking business overall is relatively less mature. However, there is still a high propotion of wealthy clients being serviced within the retail space, and banks have potential opportunities to strategically bring them over to the private banking side.
Transfers of business ownership a top priority
Kothari says that the influx of the foreign wealthy population is positive for Canada, particularly as there is the issue of an ageing population. He informs that Canada’s wealth market is largely focused on people aged 45 years and above, and approximately 60% of the wealth in the country is owned by people aged 55 and above.
However, the transfer of wealth to the next generation is a priority. "These younger people (45 years and below) are inheriting new wealth that suddenly takes them into the HNW or UHNW brackets," says Kothari.
David Agnew, head of RBC Wealth Management-Canada, says that the transfer of business ownership is a key trend that will develop over the coming years, and it is an area of focus for the bank.
"With over 45% of businesses expected to change ownership in the next five to 10 years, RBC Wealth Management is well positioned to help entrepreneurs and business owners plan for succession and with the transition itself – by finding a buyer, financing the transaction and managing their new wealth. Our expertise in business owner planning differentiates us in the marketplace."
New client needs are emerging through this demographic shift as wealth is being controlled by a diverse client base. "With the transfer of wealth to women and millennials comes the changing expectation of these clients. We have made efforts in communicating our financial advice in a manner that resonates with them," adds Agnew.
Technology continues to be a key enabler in servicing different client segments. Dave Kelly, senior vice-president of TD Private Wealth Management, says a robust technology strategy is essential to attracting the next-gen clients and it’s also changing how advisors do business.
"It is important to ensure that our advisors are armed with the right tools to help clients. We’ve also recognised the need to invest in delivering a multi-channel or omni-channel experience, uniting the high-touch human connection with a growing focus on mobile tools to drive client engagement."
Equities, cash and a home-bias prevails among Canadian wealthy
Agnew, RBC, says that the discretionary fee-based options are the fastest growing amongst the bank’s wealth management clients:
"The transactional business is in decline and the majority of our new business is coming from the discretionary model. RBC has been supporting this move over the last decade, developing leading-edge, fee-based accounts. Over 95% of our advisors are using one or more of our fee-based accounts and, according to Investor Economics, RBC has the highest fee-based assets per advisor."
According to Kothari, the wealthy in Canada are currently holding on to more cash.
"Amongst UHNWIs, approximately 25% of investable assets are allocated towards alternatives, with a 50/50 split between private equity and real estate. About 35% is allocated towards equities, 25% in cash and 15% in fixed income," he adds.
Although the UHNW demographic is globally invested, for HNWIs approximately 50% of the portfolio is invested in Canada and 25% in the US, while international investments represent about 25%.
Canadian HNWIs have a domestic bias. "You will find some US investments being held, to protect themselves from risks such as exchange rates – recently the Canadian exchange rate collapsed but it’s coming back to a decent proposition," says Kothari.
David Wilson, head of strategic analysis group at Capgemini, paints a detailed picture of the Canadian HNWIs’ asset allocations:
"Equities remained the dominant asset in Canadian HNWIs’ portfolio in Q1 2015, increasing by 0.5 percentage points (compared to Q1 2014) to reach 31.9%. Cash allocation increased by 2.1 percentage points to reach 24.6% of the portfolio in 2015."
Male HNWIs are more inclined towards equities, holding 34.1% of their financial wealth in equity as compared to female HNWIs holding 29.1%. Female HNWIs favour fixed income (20.0% vs. 15.9%).
From a products perspective, Kothari says that about 51% of Canada’s mutual funds industry is controlled by large domestic banks.
"Ten years ago, they controlled hardly 15%. I anticipate that in the next 10 years, they will have close to a 75% share," he says.
Use of credit high in HNWI portfolio
Wilson adds that borrowing is high amongst HNWIs in Canada."The use of credit in HNWI portfolios is quite significant in Canada, at an average of 12.9% as a percentage of assets. Younger HNWIs (under-40) use more credit than HNWIs who are 60+ in age (27.8% vs. 6.1%).
In Canada, 40.4% of HNWIs indicated they use credit for investment opportunities and returns, followed by 19.9% who use it for real estate.
"Even if not all are deploying credit, 31.5% of HNWIs in Canada have indicated that the availability of credit is a critical factor when making decisions about initiating relationships with wealth management firms."
Agility an advantage for boutique wealth managers
It is often challenging for smaller players in Canada to gain HNWIs’ share of wallet. Kothari, PwC says: "For the CA$30-50m investors, I think the bigger institutions are going to be dominant." Kelly, TD Bank, says: "Boutique wealth managers tend to only deal with investment management. We take a more holistic view and want to help clients with both sides of their income statement, as well as leverage trust and insurance services that are all part of our HNW team."
However, smaller wealth managers are highlighting their unique characteristics to draw in wealthy clients. Reg Mariner, senior VP of retail and business banking at BlueShore Financial – a boutique Canadian wealth manager – acknowledges the limited size but says that its primary differentiator is the "Spa banking" environment it offers.
Blueshore, with CA$4.2bn assets under management (AuM), allows clients to engage with advisors in a more relaxing environment, which Mariner says can be striking in comparison to the sometimes intimidating environment of larger banks. "Our advantage is that we’re a boutique. What comes with that are many things.
"For example being agile, our credit approval process is fast, even with complex credit. We know our clients. We also use analytics and technology systems differently to big banks," Mariner adds.
Fintech adoption to accelerate in two years
Canadian banks have been relatively "slow" to adopt fintech. In the next 18 to 24 months, however, fintech adoption is forecasted to accelerate. Several of the Big Six banks have already announced significant investments and plans to develop their technology roadmaps.
"Canadian banks recognise the importance of fintech and have begun building their fintech capabilities or acquiring fintech companies," says Kothari.
Kelly informs: "All of our investment advisors now have access to new goals-based financial planning software (IWPS) that helps them customise reports to highlight what’s important to clients and demonstrate the impact of plan adjustments in meetings. This allows for a collaborative dialogue and helps us focus our advice and planning around the client’s goals and track progress."
Kothari says that Canadian banks have been wise to not have jumped onto the fintech bandwagon in haste.
However, fintech adoption will be essential to capitalising on future opportunities.
Says Wilson: "Fintech solutions are one way to engage with the Gen Y, both at the prospecting stage as well as once they become a client. Social media tools, enabled by mobile devices, are not something that many wealth management firms have rolled out nor do they have the expertise to develop this in-house. Yet the younger HNW client is demanding such tools.
"I have observed more start-up firms provide such services (white-labeled) to wealth management firms who take an enterprise-level stance that such tools are an effective way for wealth managers to build relationships, which remain the core of a true wealth management business."