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How to Tap into Investment Strategies of Ultra-High Net Worth (UHNW) Investors

14 June 2023

Canada’s high net worth (HNW) population has grown significantly over the past two decades as investors reaped the benefits of rising stock and real estate valuations. According to Statistics Canada, the average household net worth in Canada, regardless of age, was $940,558 in 2022. The median household net worth, which arguably gives a more realistic view of Canadians’ financial situation, is likely much lower. A 2019 Statistics Canada study found that the median net worth of Canadian households was approximately $400,000 lower than the average net worth. 

Most definitions of high-net-worth individuals place a greater emphasis on liquid assets – that is, cash or money investments that can be converted to cash relatively easily. To be considered a HNW investor, you generally need at least $1 million in liquid financial assets. Although reaching HNW status is a significant milestone, being classified as an ultra-high net worth (UHNW) investor requires at least $30 million in financial assets. Despite this large gap, HNW investors can learn to maximize their savings and investments by tapping into the strategies of the ultra-wealthy. 

A Profile of HNW Individuals in Canada

According to the latest Statistics Canada data, over 760,000 Canadian households meet the high-net-worth threshold. A much smaller number – around 10,000 households – have a net worth of $30 million or higher. Although the data doesn’t specify the geographic distribution of HNW investors, it makes sense to assume they live in areas with higher home values. Investors who purchased real estate in places like Toronto and Vancouver before the housing boom are likelier to be in the HNW bracket. Older Canadians in or near retirement comprise a considerable share of HNW investors because they’ve had more time to accumulate wealth. According to Statistics Canada, investors between the ages of 55 and 64 have the highest median net worth. 

Regarding employment profile, HNW investors are often entrepreneurs, corporate executives, medical professionals, investment and consulting professionals, and members of the legal and accounting professions. It is estimated that inheritors account for less than 20% of HNW households. 

Investment Strategies of UHNW Investors

While the wealth gap between HNW and UHNW investors is considerable, the strategies employed by the ultra-wealthy can be applied by virtually anyone – especially those with $1 million or more in financial assets. UHNW investors understand the importance of savings, the benefits of diversification and the role of portfolio rebalancing to achieve their objectives. UHNW investors keep a long-term investment approach but expect their investments to make money, which is why they don’t over-allocate to money market funds, Guaranteed Investment Certificates (GICs) or savings accounts. 

According to research from global real estate consultancy Knight Frank, UHNW investors are more likely to invest in alternative assets with higher return potential. This is corroborated by a 2022 study from global investing firm KKR showing that, among UHNW investors, alternatives make up 50% of their assets, compared to just 5% for the standard investor. Although alternative investments can sometimes carry greater risk than traditional stocks and bonds, they have historically proven to improve a portfolio’s risk and return profile and enhance overall returns.

Some of the most actionable investment strategies employed by UHNW investors are:

  • Developing multiple income streams, allowing their money to work for them;
  • Investing in alternative fixed-income assets with higher potential upside than traditional bonds and GICs;
  • Diversifying to ensure their portfolios don’t lose money;
  • Living within their means and budget;
  • Getting the most out of tax deductions;
  • Working with professional investment advisers and fund managers.

Unlike most investors, who invest nearly all their assets in public markets, UHNW investors don’t shy away from opportunities in private markets. UHNW investors invest in private equity, hedge funds, mortgages, startups and real estate. They understand the importance of investing in assets with a low correlation with public markets and realize there’s more to gain from investing than just asset price appreciation. Investments that pay regular distributions are equally important as those that appreciate in price.

Because UHNW investors have much more money at stake, they are concerned with growing their money prudently. This gives them the foresight to avoid many of the common investing traps that inflict most standard investors, such as:

  • Investing 100% of their assets in public markets;
  • Failing to rebalance their portfolio;
  • Following the crowd;
  • Not including a savings strategy in their financial plan.

How HNW Investors Can Access UHNW Investment Programs

With alternative assets exploding in popularity over the past two decades, there are many ways to capitalize on the investment strategies of UHNW investors. These include purchasing exchange-traded funds and mutual funds that provide direct exposure to alternative assets, investing with venture capital or private equity firms, purchasing physical commodities like gold, investing in physical real estate or property-based securities such as real estate investment trusts or becoming a private mortgage lender through a Mortgage Investment Corporation (MIC)

In Canada, private mortgages represent a significant growth opportunity as traditional lenders continue to tighten their lending criteria in an increasingly risk-off environment. Rising interest rates, growing odds of recession and more stringent rules for so-called riskier home loan products give consumers fewer options when selecting mortgages. Like they’ve done for decades, private lenders are stepping up in a bigger way to satisfy the growing demand for mortgages. 

A study from the Financial Services Regulatory Authority of Ontario (FSRA) showed that demand for private mortgages was growing long before interest rates increased – and before the Office of the Superintendent of Financial Institutions implemented new lending rules for home loan products at the start of 2023. The FSRA study found that consumers associate private mortgages with more flexible lending terms, an easier application process and a more streamlined option for the self-employed. 

Mortgage investments have historically provided stable income while exhibiting much lower volatility and better returns than traditional fixed-income securities. This strategy, which was previously restricted to the ultra-wealthy, is now available to HNW investors through Mortgage Investment Corporations (MICs). MICs are a strategy for HNW investors who want to invest in private mortgages through a trusted and professionally managed mortgage investment corporation. As a shareholder in a MIC, investors receive regular dividends on their pooled investments generated from fees and interest paid by the borrowers. 

In Canada, mortgages are classified as “flow-through” investment vehicles, enabling them to avoid paying taxes when distributing 100% of their net income to shareholders. MICs can also be incorporated into registered accounts, including a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Account (RRSP), giving HNW investors more options to grow their income and assets in a tax-deferred way. 

CMI Financial Group is one of Canada’s private mortgage lending and investment leaders. With nearly $2 billion in successful mortgage placements, our mortgage investment solutions are tailored to the needs of HNW investors. CMI MIC Funds offers three distinct mortgage funds, each with a specific risk/return profile.. Whether you’re investing for portfolio growth or capital preservation, we have an investment program tailored for you.

Are you a HNW investor interested in becoming a private lender? Contact us today to learn about our investment process or to request a free consultation with a CMI investment professional.

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