Our Insights

Canada's money is on the move

Considerations for wealth managers: liquidity events and holistic planning

Canada’s wealth is becoming increasingly concentrated with and controlled by the nation’s aging population. Over the next decade, much of that wealth will be transferred, with nearly CAD 900 billion dollars expected to be passed on. The majority of inheritors will be in their 50s and 60s, and are likely to use their enhanced wealth to reduce levels of personal debt, add to retirement savings, and support family members rather than indulge in luxury items. Wealth managers have an opportunity–and a necessity–to redefine their client relationships to support the changing demands of wealth owners and their families.

Wealth trends

Key insights

  • Almost three-quarters of financial wealth in Canada is concentrated among a relatively small number of affluent households
  • Demographic shifts in the ownership of wealth and the distribution of income will give women and older households greater influence over the use and management of household wealth
  • The transfer of approximately CAD 900 billion in wealth will present both a challenge and opportunity for financial advisors as estate planning and advice to inheritors become critical services
  • Investment management and financial advisory firms are broadening their services to recognize changing priorities of affluent families

From a household wealth perspective, the number of high-net worth households holding in excess of CAD 1 million in financial wealth is expected to grow from 802,000 at the end of 2018 to 1.3 million by 2028, representing a 5.4 percent 10-year compound annual growth rate1.

“If our projections are reasonably correct, and so far our track record has not been too bad, we’re expecting wealth concentration to continue to increase,” said Keith Sjogren, Managing Director of Consulting Services for Investor Economics2. “The amount of wealth controlled by households, even at the ‘upscale’ range (from CAD 500,000 to CAD 1 million) is set to go up, not down.”

An aging population is increasing the pace of liquidity events in Canada

Sjogren anticipates that the increased concentration of wealth will largely be the result of a growing number of liquidity events, specifically real estate and business dispositions. First, approximately 40 percent of baby boomers are expected to downsize their homes in the decade ahead. The second and, perhaps, more significant influence will be an increase in the number of business owners that will sell their firms in the next 10 to 20 years as they transition to retirement.

“Around 50 percent of family businesses are expected to change ownership. It is not going to be to the sons and daughters. They are actually going to be sold,” said Sjogren. “These liquidity events are going to result in cash that needs to be managed.”

Wealth managers have an opportunity–and a necessity–to redefine their client relationships to support the changing demands of wealth owners and their families

Sjogren explained that the increased pace of liquidity events will have short-term benefits for asset managers, as it often enables investors to maximize contributions to various types of registered accounts, such as RRSPs and RESPs. The transformation and transfer of wealth can provide an opportunity for advisors to revise financial plans, particularly tax and estate plans. “Large liquidity events will demand a re-think of portfolio strategies,” he said. “Overall, liquidity events are positive for advisors in the short to medium term.”

Inter-generational transfers increasingly taking place before death

Sjogren predicts that around CAD 900 billion will move between generations over the next decade, but notes that transfers will not take place all at one time.3

In previous generations, inheritances commonly occurred following the death of a parent. “People used to inherit money and go on an expensive cruise or buy a new car, something with no long-term value,” said Sjogren.

Today, elderly Canadians are increasingly using their wealth to support children and grandchildren during their lifetimes.

Sjogren predicts that around CAD 900 billion will move between generations over the next decade

“Wealth transfer can take place over a long period of time. It’s no longer something that only happens upon the wealth owner’s death,” Sjogren said. “Part of that process has changed to facilitate more effective tax planning, and it also recognizes that wealth and its distribution, is a family matter, not an individual issue.”

The size and timeline for these transfers will be shaped, to some extent, by real estate and capital market conditions, and parental longevity, he adds.

Inheritors will prioritize family over individual needs

In the coming years, an increasing share of Canada’s wealth will be controlled by elderly and female wealth holders who are likely to prioritize their family’s well-being over financial risk taking and spending.

These trends are having an impact on the wealth management industry. According to Nexus Investment Management Inc. Vice President and COO, Denys Calvin, many firms are moving beyond stock picking and technical counselling towards offering more holistic solutions.

In the coming years, an increasing share of Canada’s wealth will be controlled by elderly and female wealth holders

“You’re seeing more firms expand their services to include roles and expertise that focus on financial planning and financial counselling, in addition to portfolio construction,” he said. “We need to have more holistic conversations with our clients that recognize and integrate their family objectives and wealth transfer strategies. It’s important to move beyond purely technical conversations.”4

That broader spectrum approach leads to higher levels of satisfaction and client retention rates, which can also translate into a strong referral funnel. ”If you do it properly you end up winning in situations where the previous investment manager perhaps didn’t establish those ties,” he said. “Those personal relationships in the wealth management industry are invaluable.”

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Sources

  1. Pre-release data from 2019 Household Balance Sheet Report published by Investor Economics, an ISS Company
  2. RBC Investor & Treasury Services' Investor Forum (May 8, 2019) Demographics: Demographics and Wealth Management
  3. Interview with Keith Sjogren (June 6, 2019)
  4. Interview with Denys Calvin (July 19, 2019)