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What wealthy Canadians want

High-net-worth individuals have different needs than the average investor. Here’s what you need to know about working with these kinds of clients.

By: BRENDA BOUW

Date: December 18, 2015

You might think that the world’s wealthiest also take the biggest stock-market risks – after all, they seem to keep growing their nest eggs – but you’d be wrong.

In fact, studies have shown that high-net-worth individuals actually take fewer risks than the average retail investor who wants to reach a new level of affluence, says Craig Strachan, Vice-President, Head of Product, at Fidelity Investments Canada.

For these Canadians, wealth preservation is often more important than wealth creation.

“If you don’t have it, you want to make it, but if you have it, you want to keep it,” Mr. Strachan says.

Part of that mentality is knowing not to panic when markets fall. High-net-worth investors, says Mr. Strachan, are far more attuned to downside protection – they focus on minimizing their losses in bad markets – and less worried about underperforming on the upside.

“That means they don’t need to take the same degree of risk as others do,” he says.

For those advisors who want to work more with high-net-worth clients, understanding how this group invests and what they want out of a portfolio is critical – it may be quite different from what the average retail client needs.

Structuring the HNW portfolio

High-net-worth investors tend to pay closer attention to tax than others do. They’re typically in the highest income bracket, and they acutely understand that the more money they can keep in their pockets, the more they’ll have later in life.

With that in mind, portfolio construction can go a long way. For instance, a wealthy Canadian might prefer to own more dividend stocks, since dividends are taxed at a lower rate than income.

They may also want to invest in corporate class funds, which allow investors to move money into different funds without triggering a capital-gains event.

When it comes to minimizing risk, many affluent investors have their money in special investment pools, which they can tap into because of the size of their portfolio. These pools are run by institutional money managers – they often come with more attractive pricing, and they’re designed to protect the downside. They’re also diversified, but the total number of holdings is considered more concentrated relative to the index , says Mr. Strachan.

High-net-worth clients are also usually invested in more stable blue-chip stocks in sectors such as financial services, says Mr. Strachan. Despite what many people think, they’re usually not betting their futures on high-flying tech companies.

“They need steady, stable companies that will grow their earnings year-over-year – the boring stuff,” Mr. Strachan says. “These are the stocks that are going to be there tomorrow.”

More sophisticated investment needs

Advisors who want to work with the high-net-worth set can’t do it alone. In many cases, these individuals need lawyers, accountants and, if a company is involved, business planning experts. They may already have a team in place, or they may want guidance from you.

This is especially true as these investors get older. Their portfolios tend to become more complex and their families expand to include children and grandchildren.

“Most wealthy Canadians develop sophisticated investment needs as they age – they look beyond standard funds and securities, they move from building wealth to managing security and its transfer,” says a Canadian Securities Institute report on the needs of wealthy clients.

Affluent Canadians are looking for “trust expertise,” the report notes, which includes a deeper understanding not only of the market, but also tax and succession planning, including trusts and holding companies, as well as varied asset classes such as hedge funds and private equity investments.

“It means we as advisors need to dig deeper and look at the purpose of the money,” says Adam Laird, stewardship counsellor at Oakville, Ontario-based HighView Financial Group, which caters to high-net-worth clients.

His job requires him to get to know his company’s clients and to get a better idea of what they truly want to do with their money. Every client has different needs, he says.

“They are in a unique situation, so we have to address it very personally and determine how they can maintain their lifestyle and maintain the family status they’ve created,” Mr. Laird says. “It’s not so much about, ‘How much are we going to make you this year?’ They don’t want to hear ideas of how they can double their money. In fact, rate of return rarely comes up in these meetings.”

Instead, Mr. Laird says high-net-worth investors want a strategy on how to preserve their current lifestyle and leave money behind for children or maybe charitable causes.

For many wealthy Canadians, planning revolves around ways to help them lead a fulfilling life. What they don’t want is for money to change them.

“They say, ‘Okay, we have this money, but I still eat the same cereal in the morning. How are we going to steward this wealth appropriately to advance our life but not drastically change it?’” Mr. Laird says. “They are pleased with their success and want to maintain it and build upon it.”

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