Planning is crucial in boosting financial well-being and protecting wealth

Key findings

• More than half of Canadian investors are concerned about their long-term financial well-being, including those at the highest wealth levels.
• More Canadians identify protecting their wealth as a top goal rather than increasing their wealth.
• More than three-quarters of Canadian investors say today’s market requires more flexibility and responsiveness.

More wealth does not always equal more optimism for long-term financial well-being. Saving enough for long-term goals like retirement and preserving wealth to pass down to the next generation, while managing an increasing cost of living and other more immediate expenses and needs, can be challenging, but long-term planning can help.

Over the next decade, the number of high-net-worth individuals (HNWIs) in Canada is projected to nearly double from almost 500,000 in 2019 to 914,000 individuals, growing at a faster rate than the U.S. and an amount similar to the number in the UK. Canada also ranks third out of 15 countries globally in terms of market openness, attractiveness and activity that contribute to the ability to generate wealth, according to The Economist Intelligence Unit’s 2019 Wealth Opportunity Index (1). Overall, the country ranks just above the middle of the pack for the opportunity to generate wealth, ahead of markets such as Japan, Germany and the UK.

While Canada appears to have a relatively strong environment for wealth creation, more than half of Canadian respondents (53 percent) are concerned about how they will ensure their long-term financial well-being. For example, those at the highest wealth range (US$5MM+, or C$6.44MM+, in investable assets) highlight competing financial priorities among their top concerns (33 percent), while, more broadly, a rising cost of living is the number one obstacle to reaching financial goals for 45 percent of Canadians (a higher rate than their peers in the U.S. and UK).

These are among the findings of a survey by The Economist Intelligence Unit , commissioned by RBC Wealth Management. In addition to spanning regions, genders and generations, the survey included HNWIs (those with at least US$1MM [C$1.34MM] in investable assets), adult children of HNWIs (HNWCs), and those who are not yet HNWIs but who have a minimum income of US$100,000 (C$134,000) (HENRYs) (2). 

Structured planning for long-term financial comfort

To overcome these challenges, “proper long-term planning is important,” says John Fullerton, founder and president of Capital Institute (2). He explains while people may have a higher net worth and robust cash flow, they could find themselves spending towards the top end of the range they can afford, which creates pressure. Even among those at the highest wealth levels, a rising cost of living is seen as a larger obstacle than other challenges such as having to take care of family.

While concerns about future financial well-being are higher among HNWCs (63 percent) and HENRYs (62 percent), this challenge remains prevalent even among the wealthier respondents. Notably, 58 percent of Canadians at the highest wealth levels share this concern.

Business owners and entrepreneurs (BOEs) also say long-term financial well-being is a major concern, but, at 44 percent, the level is lower than the average among Canadian respondents. This difference may well be explained by the fact that many BOEs focus less on their own financial well-being and more on their business. In particular, 49 percent of business owners and entrepreneurs agree the success of their business matters more than how much wealth they can earn directly from the business, compared with only 38 percent who disagree (4). 

Protecting wealth is major concern across wealth groups

In correlation with their concerns around long-term financial health, Canadians are more interested in protecting rather than increasing their wealth (see Figure 1). HNWIs see a particular need to protect their wealth for their future well-being (53 percent), a higher rate than their peers in the UK (40 percent). This desire to protect wealth ahead of growing wealth is also prevalent among women. More than 1.5 times as many women cited protecting their wealth as a top goal compared with increasing their wealth (5). Similarly, more BOEs (50 percent) than non-business owners (36 percent) see protecting wealth as a top goal.

FIGURE 1: Safeguarding the future

Which of the following are your most important financial goals? Select the top three. (percentage of Canadian HNWI respondents selecting each option)

Even among HENRYs, who are 21-38 years old and do not have significant wealth yet, the survey shows there is essentially an even split among those who identify wealth creation or wealth preservation as a top goal (6). These priorities may be due to HENRYs coming of age in an economic environment fraught with uncertainty.

“Many younger Canadians bore the brunt of the Great Recession and witnessed its heavy toll on the financial markets. Recent volatility in the stock markets has also shaped a more cautious mindset,” says Don Kottick, president and CEO, Sotheby’s International Realty Canada.

Creating a plan to alleviate financial concerns

In response to these types of realities, investment strategies can adjust or adapt in an uncertain economic environment while protecting wealth for the future. When it comes to changing their investment strategies over the next five years, Canadian investors prioritise shifting to less risky investments and ensuring greater diversification (see Figure 2).

Touching on this latter trend, Lisa Kramer, professor of finance, University of Toronto, comments that “the human tendency to be drawn to what is already familiar can cause investors to be under-diversified. Holding stock in industries where [the investor] doesn’t work, and in regions and countries where she doesn’t live...can help her ride out economic bumps with greater resilience.”

FIGURE 2: Changing course

In which ways do you anticipate your investment strategy will change in the next five years? Select all that apply. (percentage of Canadian respondents selecting each option)

*Please consult a qualified adviser or other qualified financial professional for more detail.

Investors can also benefit from greater access to information, knowledge and financial planning resources, with respondents saying the top three factors that provide more opportunities for people to generate wealth today than in the past are better education (58 percent), access to the internet/new technologies (51 percent) and greater access to financial planning resources (42 percent). Reinforcing the importance of this final point for younger investors, a lack of financial planning/experience is cited as an obstacle by three times as many HENRYs (13 percent) and HNWCs (12 percent) than HNWIs (four percent).

With 76 percent of Canadian investors also saying today’s environment requires more flexibility and responsiveness, and 78 percent agreeing that it is more important than ever to future proof one’s wealth, there is clear consensus that investors need to be fully engaged when considering their wealth and investment strategies. Although the world is currently beset by high levels of uncertainty, investors still have the power to act.