The number of high net worth (HNW) individuals in Canada fell by 0.9% in 2011, with a notable decline in ultra HNW investors, as market returns dwindled and investors flocked to safe haven investments, according to the 2012 World Wealth Report by Capgemini and RBC Wealth Management.

The report, presented on Tuesday, revealed that the number of individuals in Canada with at least US$1 million in investable assets declined to 279,900 in 2011 from 282,300 in 2010. There was also a small contraction in the amount of investable assets controlled by high net worth individuals in Canada, according to Gay Mitchell, deputy chairwoman at RBC Wealth Management.

“The contraction actually occurred at the higher end of the population band relative to wealth, so the ultra high net worth … are feeling the biggest pressure in terms of contraction in numbers,” said Mitchell, who presented the results in Toronto.

The small contraction follows two years of strong growth in Canada’s HNW population, according to David Wilson, strategic analysis group manager in the market intelligence unit at Capgemini Financial Services – a global consulting and technology firm.

“Canada’s actually performed quite well in many respects,” he said. “It performed above the North American average in terms of growth in 2010 and 2009, during the core recovery phase. So that puts [the decline] into perspective.”

Globally, the HNW population actually increased slightly in 2011, rising to 11 million from 10.9 million in 2010. That follows 17.9% growth in 2009 and 8.3% growth in 2010. However, the overall financial wealth of the global HNW population declined by 1.7% in 2011 to US$42 trillion, according to the report.

Most of the growth in the population of HNW individuals last year was concentrated among those with between US$1 million and US$5 million in investable assets. This group, which represents 90% of the global HNW population, grew by 1.1% in 2011, and their wealth rose by 0.8%.

In contrast, the global population of ultra HNW individuals – those with investable assets of at least $30 million – declined by 2.5%, and saw their wealth drop by 4.9%.

The main factors driving the decline in wealth last year included a slowdown in real GDP growth around the world, along with market volatility and macroeconomic uncertainty caused in part by the Eurozone sovereign debt crisis, earthquakes in Japan and New Zealand and widespread unrest in the Middle East.

“The end result of all of these developments was a highly volatile market, where investors grappled with a lack of safety in assets and searched for yield,” said Mitchell. “The prevailing sense of risk aversion also resulted in some investors adopting a policy of ‘wait and watch’.”

Wealth management firms, advisor must adapt

This market volatility is expected to continue in the year ahead, which presents challenges for wealth management firms, the executives said.

“Wealth management firms are facing a very challenging and prolonged period of investor uncertainty and a search for capital preservation which challenges their business models,” Mitchell said.

Indeed, the report shows that industry profits have come under pressure as costs have risen faster than the growth in revenues in recent years – largely because intense competition for high-producing advisors has driven up advisor compensation.

“The imperative for wealth management firms now is to chart a course to profitable AuM growth, while bolstering the client-advisor relationships that are the lynchpin of the business,” the report says.

To adapt to these profitability pressures, Wilson said wealth management firms should focus pursuing ‘scalability’ by exploring new market opportunities and finding new sources of revenue.

In addition, Wilson said firms must ensure clients remain satisfied despite the ongoing market volatility that’s driving down the value of their portfolios. Firms should enable advisors to spend as much face time as possible with clients, through, for instance, the use of technology to improve advisor productivity, he suggested.