HNW market tough nut to crack

The high-net-worth marketplace in Canada is booming and does not appear to be letting up. With a projected growth rate of nearly 88% over the next seven years, it’s a hotbed of opportunity for advisors across all wealth-management channels, according to Earl Bederman, president of Investor Economics.

Speaking to advisor audience members Wednesday at a marketing wealth management conference, Bederman suggests advisors try to understand both the demand and supply sides of the industry.

“It’s very important to know something about the size and the structure. [That] will assist you in understanding the needs of your clients today and into the future, but also where the opportunities are,” Bederman says.

At the end of 2006, the wealth market in Canada represented an asset base of approximately $2.4 trillion, which is projected to grow at a compound annual growth rate of 9.3%. By slicing and dicing that figure into age, segment and local market, Bederman’s team was able break it down into very narrow areas of analysis to allow for projections into the future. Though the demand side of the story is certainly a positive one, Bederman says that fact alone doesn’t make it easy for advisors, as many people in the financial services industry assume such high metrics will make success a virtual cakewalk.

Indeed, of the “$1 million plus” segment in terms of Canadian households, 2005 data indicates there are currently 415,000 HNW households, controlling about $1.3 trillion, or more than half of the overall financial wealth market of $2.3 trillion . (These figures will change over the coming weeks as Bederman’s firm reworks the projections, although he says in every respect the metrics will be higher in terms of the size and growth.)

In a country of 13 million households, HNW abodes don’t exactly represent a huge number. However, there is still a huge opportunity to serve the HNW since it’s a market that will experience continued growth of around 10%, Bederman notes.

Bederman points out that wealth is highly concentrated in the Canadian marketplace, with the average investable assets of HNW households at about $3.1 million in 2005 (projected to rise to $3.2 million by 2009). The $1-million-plus household market can be broken down into segments of $1 million to $5 million (over 75% of the segment, or 335,000 households), which represents the segment that will be the fastest growing over time); $5 million to $10 million (60,000 households) and $10 million-plus (20,000 households).

The majority of the $1.3 trillion of financial wealth is controlled by what Bederman refers to as the “deca-millionaires,” those affluent individuals who will ultimately be increasingly looking at family-office opportunities among financial services professionals.

Bederman cautions that planners need a clear understanding of where the true wealth-planning opportunities are and where they’re heading — and according to the data all arrows are pointing West.

Between 2002 and 2005, the number of millionaire households in the west has grown faster than in central Canada. For example, Alberta has experienced the fastest HNW household growth, at a rate of 10%, with 59,000 households. Ontario remains the epicenter of wealth, however, with 160,000 HNW households — a jump of 6.3% since 2005.

Bederman notes this snapshot should give advisors pause to consider the true nature of one’s organization and whether one has the ability to shift his or her locus of operation, perhaps concentrating on one’s core geographic area of the marketplace.

Broken into age segments, 41% of the $1 million wealth is currently controlled by households that are age 65 and over. The boomer segment also currently controls 41%, or 167,000 HNW households. Bederman explains these people are obviously thinking about their future and continued accumulation of wealth so it’s paramount for advisors to understand the vastness of that opportunity and the particular market he or she wants to go after.

Jumping to the “supply side” of the market, Bederman says “supply does respond to demand and the expectations of the demand,” but again warns advisors not to approach the market as a homogenized mass, as the competition on the supply side is “going like gangbusters.”

While looking at the organization and the opportunity in the HNW area, advisors also need to look at the marketplace in terms of its challenges. “If you operate in the traditional mass-affluent market, you now have to start to think in terms of the fact that it’s your client base that’s accumulating wealth . . . and to understand the dynamics and changes that are going on in the wealth market in the financial services arena,” he says.

When it comes to the primary advisors to Canada’s HNW households, full-service brokers currently take the lead at 37%; while 22% of households use investment counsellors; and 21% opt for financial planners. Bederman says a big challenge is that more than half of the HNW households that use a financial planner are not satisfied. Only 48% of these households believe their advisor is exceeding expectations, compared to much higher satisfaction rates of for brokers (56%) and 67% for investment counsellors (67%).

“It doesn’t necessarily mean that financial planners are out of the game, but it means that the nature of financial planning and what particular advisors do will have to change,” he says.

Bederman notes two major groups of competitors are staking a claim to the booming discretionary management market: full-service brokerages and private investment counsels. Full-service brokers are the heavyweights in terms of market share of wealth management (56%).

Filed by Heidi Staseson, Advisor’s Edge, heidi.staseson@advisor.rogers.com

(05/10/07)

Heidi Staseson