After a five-year hiatus, CFA Society Toronto hosted the 2017 Annual Wealth Conference. Its main message? “Don’t rely only on what got you to the dance.” In light of numerous challenges facing the wealth management industry, and rapid changes in technology in particular, it’s more important than ever for the industry as a whole to increase the breadth of services it offers.

Wealth management is becoming more competitive, so wealth managers need to help their clients to understand the value of their services, and to provide the tools that will enhance clients’ experiences.

Market Segments

First off, in order to remain competitive, the industry must identify future trends and growing market segments. Keith Sjögren, managing director at Strategic Insight, said 8 per cent of households control approximately 82 per cent ($3 trillion) of the wealth in Canada. This market segment, he said, is expected to expand significantly in the future as retirement savings are expected to grow. High net worth (HNW) individuals over the age of 65 will control an increasing amount of total wealth, he said. Moreover, while the number of intergenerational transfers is expected to decrease, the concentration of wealth being transferred will be much higher than it is right now.

Another growing segment to watch for is affluent women, he said. According to Investor Economics, HNW women in Canada are projected to control approximately $2.7 trillion of the country’s wealth by 2024.

Technology Abounds

Technology is arguably the most significant challenge wealth managers face, said Bob Dannhauser, head of global private wealth management at the CFA Institute. On the one hand, robo-advisors are on the rise and clients want to understand the fee difference between robo-advisors and traditional money managers, so it’s likely that the top line of wealth management firms will begin to shrink, he said.

Technology is permeating every aspect of our lives and clients want information to be available on demand across various platforms, he said, adding that this is especially true of younger generations. That said, wealth managers can benefit from using technology strategically in order to increase efficiency, control costs, and improve margins.

Recent economic developments, too, continue to have a significant impact on the wealth management industry. Given the current low interest rate environment, he said, personal savings rates may continue to decline as households choose to add low-cost debt to their personal balance sheets. Moreover, the red-hot housing market, especially in Vancouver and Toronto, is eating up disposable income and investable funds. These factors, coupled with changing technology trends, may add fuel to the fire in an already competitive industry, he said.

So how should wealth management firms acquire new clients? According to Dannhauser, “cold-calling is a relic of the past.” Most quality referrals will come from existing satisfied clients, he said, so it’s paramount that managers meet clients’ expectations. Clients are becoming more sophisticated and demanding additional services, such as tax planning, he continued.

Moreover, wealth managers can expand relationships with existing clients to include other family members, he said, adding that this is an effective way to increase the level of managed wealth. More clients are shifting their focus from asset allocation to the family’s total wealth management and cash flow needs.

Family Matters

Family offices in Canada face challenges and opportunities, too, said Tom McCullough, co-founder of Northwood Family Office. A multi-family office acts as a private CFO for wealthy families and manages their financial affairs. While McCullough agreed that the rapid advances in technology (i.e., robo-advisors) have an impact on many wealth managers, family offices are unlikely to be affected by robo-advisors, in his opinion. “I can’t see it disrupting us in a significant way, because what we’re bringing is judgment, reason, and wisdom. To simplify, most robo-advisors are essentially using algorithms to determine asset mix. Oftentimes, what families are really looking for is balanced judgment to the family’s actual situation.”

Moreover, McCullough supported the notion that offering additional services is of paramount importance for wealth management firms. “I can’t imagine how one can do effective investment management without cash flow forecasts and a good understanding of the client’s tax position,” he said. “I believe these components are critical to the overall investment management process. The various aspects of a client’s life are integrated, so a holistic approach to financial management is warranted. At some point in the not-too-distant future, I believe this will become the norm.”

One of the unique challenges family offices face is helping their clients prepare future generations to receive wealth. This is important, as the concentration of intergenerational transfers is projected to increase in the next 10 years, McCullough said. However, many of these efforts fail, he continued, because of lack of communication and trust. Therefore, as he put it, it’s important to “train the wide receiver”— not just “focus on the quarterback.”

But even wealth creators may not be aware of alternatives for successful wealth and business transitions, said Susan Fulford, managing director at Dynamic Legacy Inc., who specializes in providing strategic advice to wealth and business families. “Families need to spend time understanding options and preparing the next generation.” In her experience, many families are “challenged by their perception that the next generation may be disinterested in the family business, or fear entitlement and irresponsibility towards wealth [by the next generation].” But Fulford still sees opportunity and innovation in millennials. Selling the business is not always the best wealth solution, she said.

“Wealth creators focus on succession plans, but meaningful engagement of family members is as important,” she added. In her practice, she bridges this gap by facilitating multigenerational meetings, and building competence and confidence in the next generation by using global best practices. “We know why 85 per cent of transitions fail by the third generation—we problem solve for those identified challenges. If we get them right, we create sustainable futures.”

Tax Breaks

Tax-efficient wealth management is another issue, said Jamie Golombek, managing director, tax and estate planning, at CIBC. He highlighted that the top marginal rate in Ontario remains at 53.53 per cent; according to the Canada Revenue Agency, only 253,000 individuals (1 per cent) reported income in excess of $250,000.

Golombek also discussed various tax strategies and different types of savings. For instance, he compared different options, such as investing in an RRSP or a TFSA, or choosing debt repayment. If the current tax rate is expected to be the same as the tax rate at the time of withdrawal, and the interest rate on debt is the same as the rate of return on investments, he concluded, then there is no difference between the three options.

While many considered the 2017 Federal Budget to be much ado about nothing, Golombek highlighted some areas that the Liberal government will likely target in the future: using private corporations to reduce overall family tax liability, for example. Specifically, he expects the federal government to review various tax strategies such as dividend sprinkling, and converting regular income into capital gains.

The 2017 Annual Wealth Conference provided attendees with much information from myriad knowledgeable speakers. In the end, the main takeaway was clear: wealth managers must continue to enhance their service offerings in order to remain competitive in a changing industry. In other words, it’s not enough to show up at the dance: you have to work on that groove and keep dancing.