Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

The World’s Wealthy Recover

By John Nicola, CLU, CHFC, CFP


Fitzgerald: “The rich are different than you and me.”
Hemingway: “Yes, they have more money.”

Even though this conversation between Ernest Hemingway and F. Scott Fitzgerald is entirely apocryphal and never occurred, it seems no less true.

Over time, our definition of what constitutes “being rich” has changed.  Each year, Cap Gemini and Merrill Lynch publish a report of the investment styles, issues and concerns of the world’s wealthy families. Their definition of wealthy is $1-million of investable assets outside of a primary residence.

There are almost 11 million such families worldwide.  Of these, the Ultra-High Net Worth (UNHW) family is defined as one that has at least $30-million of investable assets.

My guess is that most people with more than $1-million do not consider themselves rich and one would need to get into the UHNW group before that label applied.

In reviewing this report, I plan to address the two issues that I felt were most interesting:

  1. How exactly did the rich recover their wealth from losses in 2008? How does the “wealthy Canadian” stack up, and what can we learn?
  2. How do the world’s wealthy view their advisors?  What can we, as advisors, do to improve?

The Rich Recover

If you read the 2011 Cap Gemini World Wealth Report, you will see that the world’s High Net Worth (HNW) families have recovered nicely since 2008.  However,  while the number of members in this elite group has increased by almost three million families since 2008 with total net worth of $42.7-trillion (5% more than at the end of 2007), it was not actually the recovery of the equity markets that returned their wealth.


On a global basis, equity markets are still 11% below their 2007 peaks (a tidy sum of $7-trillion).  If you factor in the impact of dividends, the loss is lower at -5%, but hardly the kind of returns necessary to build wealth.

So how did they recover their wealth so well?  Primarily, they took Mr. Micawber’s advice to heart and added to their savings from their income (in most cases, we presume, a little more than sixpence).  They also maintained a healthy balance in their asset allocation.  As you can see below, they generally keep no more than 1/3rd of their wealth in equities (although North Americans are much higher at 42%).

This no doubt allowed the absolute returns on their entire portfolio to be positive since the high water mark of equity markets at the end of 2007.  (This same balanced approach has worked for our clients as well, who, at the end of 2010, had a three-year cumulative return of 17% after fees.)

There is a cautionary tale here.  The HNW market was increasing exposure to equities after a major run up in prices.  This data is from the end of 2010.  It would be interesting to know whether or not they reduced their positions before this current debt crisis and market correction started.  On average, North Americans have 42% in long-only equities, and we firmly believe that is too high. Right now we are at about 32% and more than 50% of that is partially hedged with covered calls and puts. (Read John’s memo on the current markets and our strategy.)

These World Wealth Report numbers support a concept that is at the core of our philosophy and the foundation of each client portfolio: wealth creation requires extensive diversification.



What other pearls of wisdom can Canadians glean from this annual analysis of the investment habits of HNW individuals around the world?

  • Women have increased from 24% of HNW investors to 27% globally (and 37% in North America).
  • Asia just passed Europe with 3.3 million HNWs vs. 3.1 million. (North America has 3.4 million.)
  • We have just under 300,000 HNW families in Canada, of which about 1% (3000) would fall into the UHNW category.
  • India moved into the top 12 with 153,000 HNWs. China has just passed 500,000, but is still a long way from the 3 million families in the U.S.  Furthermore, China added 60,000 new families to their total, but the U.S. added four times as many (240,000).  It appears China will take some time to surpass the U.S. in this measurement of wealth.
  • 17% of HNWs are now under 45 (that number is a huge 41% in Asia, outside of Japan though).  In Canada, this group is mainly specialized professionals and entrepreneurs.
  • While we continually hear about the profligacy of governments and individuals around the world, total savings rates (government, corporate and personal) reached 22% of Global GDP in 2010 (however, it is only 10.9% in North America vs. 39%+ in Asia).  Government debt and deficits are a major economic concern for good reasons, but each dollar of debt is also someone else’s asset. (In effect, if annual global savings are well in excess of $12-trillion per year, that money has to be invested or lent somewhere. It may be part of the reason why government debt levels can be so high and yet interest rates remain low. PIIGS being the exception of course.)
  • All areas of the world have a home bias when it comes to investing, but it is far more pronounced in North America, where 76% of HNW’s assets are in their home markets vs. 57% in Asia and 56% in Europe (although to Europeans – American treasuries might look  like a relatively good investment).  Home bias is a particular issue in Canada, which simply does not have the depth of equity, debt or real estate markets to allow for strong diversification.  Because our dollar is relatively strong compared to other currencies, this provides a great opportunity for Canadian investors to diversify with good pricing into other countries and markets.

HNW Investors: Concerns & Priorities

While satisfaction levels for advisors seems to have  completely recovered from 2008, HNW investors have a number of areas of concern as well as key priorities that they feel are not being met by their wealth management firms.

First, let’s look at their key concerns.

It seems investors can understand that with economic conditions being less than perfect and government deficits at record levels, the risk of tax increases has risen considerably. This also leads to concerns about whether their wealth will support their lifestyle and whether their future income can keep pace with inflation.

As most of our readers know, we have always focused our planning around building a tax-efficient portfolio that relies on a significant portion of its return from cash flow (dividends, rents and interest).  In times such as now, these attributes are critical.

Our question for our readers is: How would your “Top 6” priorities compare to this survey?  Improving through client feedback is important to us and we would love to hear back from you on this.

We cannot speak to the rest of the industry, but here is what we as a firm have been able to provide our clients with respect to the priorities noted above:

  • Capital Preservation: Significantly less volatility than traditional balanced portfolios (one negative-return year between 1994 and 2010 – an average client loss of -6.5%  in 2008, compared to benchmark* balanced returns of -19%).
  • Effective Portfolio Management: Average returns after fees of 6.8% per year since January 2000.  About 3.4% per year above the benchmarks.
  • Specialized Advice: We have always emphasized the importance of a comprehensive financial plan being understood and endorsed by the client before investment recommendations are made. When required, we will find the necessary external expertise to deal with important areas of planning (such as wills, tax structure, philanthropy, etc.)
  • Detailed and Comprehensive Reporting: We have reported client returns net of fees since 1997. We now also report on cash flows generated from portfolios, fiscal reporting requirements necessary to finalize tax returns, and performance attribution of individual holdings within each portfolio.
  • Global Asset Allocation: We offer seven pools or limited partnerships that invest all or part of their funds in non-Canadian assets.

*Benchmark: 60% Globe Cdn Neutral Balanced Peer Index and 40% Globe Global Neutral Balanced Peer Index.

Value Levers for HNWI

Apparently wealth management firms are dropping the ball here.  There are a number of areas of service that HNW investors expect from their advisors and they are not being delivered upon.  In fact, based on the top four “value levers” there is a 30% gap between the importance to the client and the performance of the advisor:

What are these “value levers?”

  • Advice and Expertise during wealth creation
  • Preferred financing for Entrepreneurs
  • Unique investment opportunities
  • Cross Enterprise expert advice teams

We would like to think that we do provide these value levers to our clients, but this survey suggests there is a gap between the wealth manager’s perception of their delivery and their clients’. With this in mind we would like to hear from you about how we can better provide you with the important planning and investment priorities.

Most of you have followed Mr. Micawber’s sage advice for your entire lives. While you do not necessarily consider yourselves rich,  you have either built up wealth that is important for you and your family, or you are starting on the path to make sure you achieve that goal.

If we can learn anything from the facts and opinions expressed by the world’s wealthy in this survey, it is that thoughtful planning is equally as valuable as smart investment choices and wise asset allocation.

We couldn’t agree more.