Canada one of the top producers of millionaires, report says

(June 12, 2003) There is good news for advisors seeking to expand their high net worth practice, as Cap Gemini Ernst &Young and Merrill Lynch released details of their World Wealth Report.

The number of high net worth (HNW) individuals in Canada rose last year, swelling the ranks of “The Millionaire’s Club” by 15,000 to an estimated 180,000. That’s a growth of 8.33% — almost four times higher than the global rate of 2.1%.

The report defines “HNW” as financial assets exceeding US$1 million, excluding real estate.

Overall, North America saw a decline in HNW of 1.9% to 2.2 million individuals and their wealth contracted by US$200 billion to $7.4 trillion. Sluggish U.S. equity markets were largely to blame, but the report points out that the 2.1% decline in wealth beat the S&P 500, which shed 22% of its value over the same period.

This indicates that the HNW were far more successful in moving their wealth into defensive positions than the average investor. The report suggests that the rich benefit from the superior financial advice that they can afford.

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“The more diversified HNW individuals seemed better able to protect their wealth than the average investor,” said Paul Battista, vice-president at Cap Gemini Ernst & Young. “Their use of expert financial advice and diversified products enabled them to rapidly and effectively reprioritize strategic objectives, from new wealth creation to existing wealth preservation.”

While the stock market continued to bleed, the HNW tended to leave their money in place, refusing to realize a loss on earlier purchases. But as a group, they were not about to commit any more cash to equities.

“They increased their holdings in fixed income and cash, and also diverted funds to alternative investments, real estate and other investments less correlated to equities. In 2002, the investor mantra became “cash (and fixed income) is ‘king,'” said Battista.

But the worldwide economic malaise can be seen as a boon to financial advisors, as HNW investors lost confidence in their own investment acumen. In the 1990s, the trend for the rich was toward active, self-directed management of their investments.

And why not? Street-level investors were making tidy profits by throwing a dart at the stock listings in their local newspaper.

When the markets hit the skids and corporate scandals began popping up, the wealthy turned back to advisors to help them preserve their capital. But the relationship had changed, according to the report.

Prior to the 1990s, the wealthy had taken a relatively hands-off approach. Now, in the wake of equity research scandals, they were less trusting and wanted more transparency from their advisors. Personal relationships were very important.

“Other market data indicated that HNW individuals who engaged ‘counselor-like’ advisors were more satisfied than those with ‘information-focused’ advisors,” the report says.

In fact, customer service seems to be as important than portfolio performance, as the report lists the top four reasons for leaving an advisor as “lack of proactive advice, poor customer service, investment errors and inadequate communication.”

The worldwide increase in HNWs of 2.1% was the lowest growth rate since the report was first started seven years ago. The report estimates that there are now 7.3 million HNW individuals in the world, controlling over $27.2 trillion.

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What do you think of the results of this survey? How do you build stronger relationships with your HNW clients? Share your opinions and ideas with your peers in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@rmpublishing.com

(06/12/03)