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The Tricky World of Wealth Management Strategizing

Encouraging good news


Even though wealth management professionals are savvy about trends, strategizing, predicting the unpredictable and expecting the unexpected, 2022 was a surprising year.

“At the start of last year, there was general consensus that inflation would mostly return close to central bank targets by the fall, around 2% on annual basis in Canada,” says Edmonton’s respected Jean David (JD) Tremblay-Frenette, chief economist at the Alberta Investment Management Corporation (AIMCo). “Instead, we are now toying with the idea of ‘higher inflation for longer’ and grappling with building portfolios that could be more resilient to inflation.

“Last year also made us realize the extent to which geopolitics can impact the future of trade amongst regions across the globe, how portfolio and investment flows cycle through, about growth, debt profiles and the long-term cost of money. Wealth management and diversification, from both an asset class and geographical perspective, have become increasingly important.”

In Alberta, the impact of the aging Boomer generation, combined with years of pandemic business disruptions and health worries, are re-defining wealth management strategies. The wealth management ecosystem is undergoing major disruption, primarily because of shifting demographics, as wealth shifts hand from Baby Boomers to Millennials. Another factor is constantly emerging and changing digital technologies, which are also boosting wealth management disruption, as well as the expectations of both investors and advisors.

“One of the big trends we saw among our clients is an increased focus on their health and wellness, and on getting their affairs in order as they age,” notes Cal Malhiot, vice president of RBC Dominion Securities for Alberta and Prairies. “We have established strategic partnerships with organizations like the National Institute on Ageing as part of a broader healthy aging strategy to help educate our clients on important issues they face as they age, such as avoiding fraud and cyber scams, preparing for health issues and organizing their estates.

“One of the new rules of wealth management is that you generally need to plan for longer life expectancies. In the past, people worked until they retired at the traditional age of 65. They collected their company pension, they invested in safe investments like GICs (which paid decent interest) and they lived for five or 10 more years enjoying their golden years.”

Now, when it comes to the basics and the strategies of wealth management and maximizing returns, there may be educated guesswork but there are no set rules.

Tremblay-Frenette explains that AIMCo invests globally on behalf of 17 different public pension, endowment and government fund clients across Alberta.

“Unlike other investment companies who may be compelled to pay closer attention to quarterly results and much shorter-term horizons, AIMCo targets performance over the long-term. We firmly believe that when you focus investments on the long-term, it outperforms trying to time holdings.”

He underscores that AIMCo has a 10-year total fund net investment return of 8.62 per cent, earning $78.1 billion in net investment returns for its clients.

Given the constant flux in the economy and the various unexpected broadsides, pension fund managers must also manoeuvre a somewhat trickier tightrope than ever before. A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf and the earnings on the investments generate income to the worker upon retirement. Pension fund assets need to be prudently managed to ensure that retirees receive promised retirement benefits.

For many years, this meant that funds were limited to investing primarily in government securities, investment-grade bonds and blue-chip stocks. Today, pension fund managers are updating and re-defining their perspectives and focus.

Some new fund manager strategies include top-down investing, bottom-up investing, fundamental analysis, technical analysis and other factors. Today, fund managers increasingly invest in a variety of asset classes, including private equity, real estate, infrastructure and securities like gold that can hedge inflation. In a sector with few strategic rules, pension fund assets must be managed with duty to ensure eligible retirees receive the benefits they were promised.

When it comes to the broader (more personal and private) minefield of wealth management, Malhiot underscores the many reports and surveys that show drastic new trends in lifestyle and aging. It’s a fact, and the stats are undisputable. People are living much longer in retirement; nearly two more decades on average past the traditional retirement age of 65, and they are re-calibrating wealth management goals, strategies and expectations.

“Things have changed a great deal since the days before the ‘Tech Wreck’ of 2000 – when investor speculation in technology stocks led to a bubble that inevitably burst,” he points out. “Investors learned some valuable lessons coming out of that painful experience. Today, investors are no longer looking for the latest ‘hot stock tip.’ They understand, more and more, that investing is a long-term process that involves setting goals and building a diversified portfolio to help those achieve goals.

“They get it. Some investments will go down, and others will go up. That’s why diversifying is important. Historically, the long-term trend of the markets is up. It helps tune out any doom and gloom about the latest ‘crisis’ affecting the markets and the economy and to stay focused on the long-term.”

While much of the business and economy aftermath of the pandemic is in the rear-view mirror, wealth management experts suggest that the past years have also impacted perspectives about life-planning and wealth management.

Malhiot mentions that the pandemic got people thinking about later-in-life planning and triggered thinking about legacy for the next generation and options for getting affairs in order.

“Ensuring that there is an up-to-date will that reflects current wishes and any recent life changes is essential. A recent RBC Wealth Management poll found that only 48 per cent of Canadians surveyed had a will, which is the basic building block of any estate plan. Among those aged 35 to 54, that dropped to 34 per cent.”

Whether it is private wealth planning or fund manager strategizing, wealth management has always been irrevocably connected to the economy. It’s why wealth management advisors and fund managers agree that at least part of 2023 will have lingering speedbumps. Goods supply chains will continue to weigh on markets, even if consumers spend more on services. Rising household debt will be a continuing concern and there is a lingering possibility of a recession, due in part to persistently high inflation.

The connection also translates into encouraging good news.

“Despite ongoing economic challenges, Canada’s economic situation is in decent shape, especially when you compare it to other countries,” Tremblay-Frenette says. “While the Bank of Canada has had a busy 2022 raising rates, the imminent economic downturn will reduce some of the excess demand that is boosting inflation. It will help prices and inflation expectations (both for consumers and corporations) come down and provide less risk over the long-term.”