Canada’s history has been driven by the efforts of entrepreneurs – individuals who have brought their business dreams to fruition and provided key goods and services to their fellow countrymen. It is no surprise, then, that the most successful of those entrepreneurs represent the vast majority of wealthy Canadians.
Rise of Self-Made Millionaires in Canada
Survey results from a BMO Harris Private Banking study reveal that 94 per cent of affluent Canadians – defined as those with investible assets of $1 million or more – made their money on their own as self-made business owners or professionals. A mere six per cent acquired the majority of their wealth through inheritance. It is therefore understandable that nearly all of these affluent Canadians say they enjoy greater wealth than their parents.
These findings speak to the strong entrepreneurial environment in which we live, revealing a culture of drive and determination among Canadians and recognize that we live in a country where self-made success is encouraged and rewarded.
Immigration's Impact on Canadian Wealth
This perception has brought people to Canada from around the world. Throughout Canada’s history, the arrival of newcomers from across the world has played a significant role in shaping our country’s social, cultural and economic development. Today, their success is clear: the same survey results show that 30 per cent of affluent Canadians – nearly a third – were not born here.
This represents a clear indicator of the Canadian spirit of multiculturalism, and how this country fosters an environment that helps individuals to succeed and thrive. Attracting the best and the brightest is a strong demonstrator of the relative prosperity and openness of Canada’s economy, and it certainly bodes well for long-term wealth generation.
Challenges Facing the Next Generation of Wealth
The changing face of wealth leads to important questions for this cohort of high-net-worth individuals. Foremost among these is what will happen to their wealth once it’s inherited.
The survey data shows that many affluent Canadians already harbour concerns about the inheritance of their wealth; in fact, when asked if their children would be able to manage the inheritance, only 58 per cent replied in the affirmative. With Canada’s baby boomers set to transfer about $1 trillion to their children over the next 20 years – enough to make one million new millionaires – ensuring the maintenance and growth of that wealth represents a valid concern.
Being wealthy can mean dealing with a complex set of financial issues; if the younger generation isn’t ready, the challenges can be daunting indeed. In fact, according to a recent survey of more than 3,000 high-net-worth families across North America, the transition of wealth from one generation to the next has resulted in loss of at least a portion of that wealth 70 per cent of the time.
Such failures stem from a number of causes, from a breakdown of communications and trust within a family unit to inadequately prepared heirs. It is seldom as a result of faulty advice on tax and legal issues. Sadly, family members in these situations often become hostile towards each other, with disagreements ending up before the courts.
Role of Family Philanthropy in Wealth Transfer
One way to help ameliorate these concerns is by encouraging participation in family philanthropy, which can play an integral role in successful estate planning.
Philanthropy can hold a special place in families – it provides an opportunity for older generations to teach the younger ones about their obligations as citizens, as well as establish a positive family activity.
Among the 30 per cent of wealth transfers that succeed, we have observed the important role that family philanthropy plays. Families that are involved in philanthropy together typically make decisions as a group, engendering communication, trust, accountability and a valuing of the stewardship of their wealth. These are the very traits that lead to successful estate planning.
Family philanthropy can be particularly important for young people – the next generation that so many affluent Canadians fear are unable to manage their inheritances. Family philanthropy gives them the opportunity to learn about the benefits and challenges of wealth. As a result, they more likely to become confident as individuals within the wealth – they define the wealth, instead of having the wealth define them. It also provides the opportunity for young people to work with their siblings on a joint philanthropic mission, and bring them closer in the process.
Family philanthropy represents one excellent example of a way of ensuring an orderly inheritance, but no matter how affluent Canadians choose to distribute their wealth, communication with advance planning is key. While proactively initiating a family conversation on the transfer of wealth may seem emotionally daunting to some, the risk of holding onto unrealistic expectations is likely to have far worse consequences.
Strategies for Successful Wealth Management
More than ever before, affluent Canadians and their families are encouraged to seek professional advice on topics that impact them financially – such as business succession and estate planning strategies. By having open intergenerational conversations about inheritance and with the help of a financial advisor, high-net-worth individuals and their families can be empowered to make prudent planning decisions about their legacy plans.
Canada’s wealthy are self-made, vibrant entrepreneurs and professionals with many achieving success after arriving from elsewhere. They have earned their wealth, but need the right strategies and advice to ensure it’s maintained for future generations. With effective professional advice, affluent Canadians can feel confident that their legacy will go on for years to come.
BMO Harris Private Banking has recently been recognized by Global Banking & Finance Review and World Finance Magazine as the Best Private Bank in Canada for the second consecutive year. To learn about BMO Harris Private Banking’s wealth management solutions, please visit bmoharrisprivatebanking.com.
