If it seems as if high net-worth investors are tough to find, it’s not your imagination. It appears that the rich are getting richer and a relatively small group dominates our country’s wealth. This growing inequality poses a challenge not only for advisors but also for policy-makers.

In terms of economic equality, Canadians have little reason to complain. Helsinki-based World Institute for Development Economics’ first-ever estimate of global wealth distribution finds that, in 2000, median net worth was US$90,906, if measured at purchasing power parity, or US$73,654 if measured at prevailing exchange rates.

New data from Statistics Canada show that median household net worth in Canada in 2005 was $148,350, up from $120,451 in 1999, the last time the research was done. The World Institute data’s cut-off to count among the top 5% of the world’s wealthiest in 2000 was US$150,145. So, while the global data are a bit out of date, they highlight the fact that the median Canadian household may be just average at home but is among the richest in the world.

Yet, within Canada itself, there is growing economic disparity. Indeed, the latest StatsCan data show that the richest 20% of households enjoyed the largest nominal jump in net worth — to $3.4 trillion in 2005 from $2.4 trillion in 1999 — and experienced the largest percentage change, up 43% in that period.

Conversely, the bottom quintile has seen its net worth, which was already negative in 1999, decline even further. The bottom 20% had a collective net debt of $3.7 billion in 1999; that had almost doubled to $6.3 billion by 2005. As well, StatsCan estimates, almost 30% of households had no private pension assets in 2005.

Not surprising, Canadians with negative net worth and no retirement savings tend to have lower incomes. Almost two-thirds of those earning less than $30,000 a year had no private pension assets.

Income and wealth are obviously closely related, and consumer research conducted for the Toronto-based Canadian Centre for Policy Alternatives this fall shows many Canadians believe that income inequality has increased in recent years. And there’s some evidence that perception is correct.

Research by Emmanuel Saez of the University of California at Berkeley found that, in the U.S., Britain and Canada, income concentration has increased over the past 25 years. Indeed, research published in the American Economic Review by Saez and McMaster University’s Michael Veall found: “Over the last 20 years, top income shares in Canada have increased dramatically, almost as much as in the U.S. This change has remained largely unnoticed because it is concentrated within the top percentile of the Canadian income distribution, and thus can be detected only with tax return data covering very high incomes.”

Saez’s and Veall’s examination of the data found that the top 1% of income earners accounted for about 7.5% of all income in the late 1970s. By 2000, that was up to 13.5%. For those just below the top 1%, their share was essentially flat in the period, highlighting the fact that it was only the highest earners making gains. That suggests the population of wealthy investors may not be growing, as those just below the top 1% aren’t capturing a greater share of income.

Moreover, it was the very top slice of the top 1% that really drove that group’s greater share. The top 0.1% saw its share of income more than quadruple to 4.3% in 2000 from about 1% in the 1970s.

The authors note that the data in Canada are very similar to that in the U.S, and yet the growing inequality at the top of the economic food chain has been more acute in Canada: “As in the U.S., the increase is largely due to a surge in top wages and salaries.”

The reason for the rise in the value of professionals in the U.S., Britain and Canada has attracted a few hypotheses. Another paper, by Saez and Thomas Piketty of l’Öcole des hautes »tudes en sciences sociales in Paris, says there are three basic theories: technology has made managerial skills more general and transferable, increasing competition and, therefore, the prices for the best executives; there are fewer labour regulations and social inhibitions preventing the increase in executive pay in Anglo economies, allowing their compensation to grow significantly; and executives have improved their ability to set their own pay and, therefore, to extract much greater compensation for themselves at the expense of shareholders.

@page_break@As for Canada specifically, Saez and Veall suggest one theory to explain the large increases in income share for the very top-paid workers is the possibility of “brain drain” — the opportunity that top earners have to move abroad, particularly to the U.S., where their skills are in heavy demand. To prevent that migration, salaries at the top have had to rise precipitously in Canada to keep pace with the market for top talent in the U.S.

Whatever the explanation, it seems clear that income and wealth are becoming increasingly polarized, not just in the rough and tumble global economy or the ruthlessly Darwinian U.S. economy but in the supposedly kinder and gentler Canadian market, too.

That fact is not going unnoticed. The CCPA’s research found that about three-quarters of Canadians believe that income inequality will intensify in the years ahead, and a similar percentage expect it to lead to higher crime rates. The CCPA also reports that focus groups explained intensifying inequality as a consequence of an increasingly materialistic “winner take all” society — a vision that Canadians tend to associate with the U.S.

Along with fears of increasing crime and civil unrest, Canadians are also insecure about their own financial well-being. They fret about the adequacy of their retirement savings and the quality of life their children will have in a more materialistic society. To the extent that such attitudes flourish, they may start to influence public policy.

Although growing income inequality poses problems for policy-makers, it also means that financial firms and advisors will find high net-worth clients to be more and more elusive. IE