The new Canadian millionaire*

Canada’s high-net-worth club is becoming dominated by people who earned rather than inherited their wealth. To preserve their hard-won treasure chests, many are using integrated wealth management

*This is an expanded version of a summary that originally appeared in the June/July 2006 issue of CAmagazine.

By Terry Jenkins

PressureCanada’s population of millionaires is growing by double digits. In 2000, there were 295,000 Canadians holding more than $1 million in investable financial assets, according to Cap Gemini’s Canadian Wealth Management Report. Within the next five years, there will be 600,000 Canadian millionaires, according to the 2005 Taddingstone Canadian Millionaire Report (see chart 1).

The Taddingstone report notes that only 24% of millionaires got their wealth from an inheritance. The rest earned their millions themselves, typically through stock options, by selling real estate or businesses, and through savings and investments. Well over half of Canada’s millionaires are in their mid-50s, and have relatively small families with few dependents (1.6 each). Although being wealthy involves living globally with homes, planes and automobiles in many different locales, more than 85% of Canada’s millionaires call Ontario, Quebec, BC and Alberta home (see chart 2).

BMO Harris Private Banking estimates that in the next 20 years, baby boomers will transfer about $1 trillion to their kids, enough to make one million new millionaires. However, it’s not easy being rich. The complexities associated with wealth can cast a tidal wave on a family’s fortune, scuttling the family treasure chest (not to speak of their ties of kinship). According to a survey of more than 3,000 high-net-worth families in Canada and the US, the transition of wealth from one generation to the next results in the decimation of wealth 70% of the time.

Here are some of the realities of being a Canadian millionaire today.

• The sandwich generation: According to Statistics Canada, 70% of baby boomers – and hence many millionaires -- expect to have to look after both adult children and aging parents, leaving them less time to pay attention to their financial portfolios.
• The global village: Many wealthy Canadians have to manage their wealth across different jurisdictions with differing and constantly changing laws and regulations. They are also concerned about the impacts of global economic shifts, wars and pandemics on their portfolios.
• Business succession planning: This is a big concern for Canadian entrepreneurs. According to a recent study by the Canadian Federation of Independent Business, almost half of small and medium-sized businesses intend to close shop within the next five years. Yet only a small percentage of these potential millionaires actually have a formal succession plan.
• Giveaways: Giving kids a significant sum of money without guidance may doom the family fortune. We’ve all heard of trust fund kids who, in the span of three generations or less, blew all of grandpa’s money. That’s why prudent clients make plans now to seed succession and to educate their kids on how to manage their portfolio.
• Remarriage: The continuing trend that a significant number of marriages will end in divorce (and often remarriage) complicates the retention and distribution of wealth. Remarried couples have to decide, for example, whether their estate will pass over the second spouse and go directly to children from the first marriage, or whether to include the new blended family. Good communication with the affected family members is essential to avoid emotional minefields and good estate planning remains a crucial wealth retention tool.

CHART 1:  FAST FACTS ON WEALTH IN CANADA, CIRCA 2005

CHART 2:  CANADIAN MILLIONAIRE DISTRIBUTION

An integrated approach
Traditionally, many high-net-worth Canadians have dealt with multiple advisors for their banking, taxes, businesses and overall estate planning. While their banking need was traditionally saving or borrowing, some of them would go to another advisor for their investment needs. However, the best way to serve all the needs of today’s high-net-worth Canadians is through an integrated solution.

As the number of Canadian millionaires grows, two distinct approaches to wealth preservation have emerged. Those under 60 who earned their wealth tend to go for effective cash flow, while the 60-plus group (who are more likely to have inherited their wealth) look more to asset management. For both groups, integrated wealth management is becoming a preferred strategy.

The integrated approach goes far beyond just “talking to your banker.” You have access to a multidisciplinary team of professionals who work collaboratively to manage the complex network of financial, legal, business and family interests so that an appropriate balance is found. For example, BMO Harris Private Banking pairs each client with a dedicated adviser who then works with an internal team of specialists in business succession planning, investment management, estate and trust planning and philanthropy and wealth transition to address relevant issues. The dedicated client adviser is the day-to-day contact, but the integrated team works together to provide customized solutions for each client’s particular needs. Clients are charged on a sliding scale, depending on which service they use.

Sometimes, it’s the client’s key external adviser (their accountant, for example), who introduces the client to the bank because they do not have the range of services that the integrated approach provides. In this case, both the accountant and the team work together to offer the best solutions for their client.

Research from the Williams Group, a wealth management consultancy in California, suggests an integrated approach can improve the odds of securing a client’s wealth for future generations. Financial sustainability doesn’t happen on its own. Clients need to find a wealth management provider who puts their interests and needs first and works with them to find solutions to the complexities of their finances and their busy lives, in order to maintain their wealth and their peace of mind.

Terry Jenkins is senior vice president and executive managing director of BMO Harris Private Banking in Toronto.