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high net worth investing

For the first time in more than a decade, Ross Smith put his portfolio up for grabs.

The retired 61-year-old had carved out a nice niche for his construction company as the largest installer of bank machines in Canada. He sold his firm a little over two years ago, retiring with wife Mary to the country near picturesque Claremont, Ont.

It was the kind of idyllic life that financial firms promise you in glossy ads. Work hard, sock away money religiously, and savour your monthly statements in between trips to Whistler or St. Bart's. Indeed, for more than a decade Mr. Smith sent money blindly to his financial advisers to slot into mutual funds, "never really following anything," he says. "I was always so busy with my business that I never even bothered looking at the financial stuff."

But then, with the markets gyrating wildly and his multi-million-dollar portfolio down by about 25 per cent, Smith was shocked into paying closer attention. And he didn't like what he saw: high-commission investments, frequent trading, and a lack of communication during the worst market storm in generations.

"It seems like everyone was getting a piece of the action but me," he says. "If they really had my best interests at heart, wouldn't they have called me months ago?"

Despondent, Mr. Smith decided to consult this spring with Warren MacKenzie of Toronto's Second Opinion Investor Services, who evaluated his portfolio for a flat fee. Mr. MacKenzie also arranged for a number of high-net-worth specialists to come and pitch for his business.

Suddenly, Mr. Smith found himself being treated like everybody's best pal.

"Each group had 40 minutes to come in, show me how they've done over the last five years, and say their piece," says Mr. Smith, who decided to split his portfolio between two advisers, Connor, Clark & Lunn, and Cougar Global Investments. "It was nice to have so many choices."

Mr. Smith is one of a growing breed: high-net-worth Canadians who are re-evaluating relationships with their financial advisers in the wake of a whipsawed market.

More than any other point in recent memory, timeworn investing philosophies are being questioned, and fees are being scrutinized. According to the spring results of the Wealth Management Index, a survey from Angus Reid Strategies, 22 per cent of Canadian investors have contemplated ditching their current advisers. After all, when the most successful and sophisticated investors in America were robbed blind by their money manager - former Nasdaq chairman Bernie Madoff, and his Ponzi scheme that recently won him 150 years in jail - just who can you believe any more?

"Clients' lack of trust and confusion has gone up significantly," says Arjun Saxena, a New York City-based partner in the wealth-management practice with consulting firm Oliver Wyman. "It's unprecedented by any objective measure. What that means for wealth managers is that clients are more open to switching advisers and switching institutions than at any time in the past. Loyalties are totally up in the air."

No wonder, with market plunges that put the fear of God into investors, who are now looking for advisers who can help prevent that kind of financial hemorrhage from happening again. Heck, they'll even take a stab at it themselves, given the huge spike in new accounts for discount brokerages. Take discount brokerage Questrade, for instance, which has seen its daily account openings double over last year alone.

It's all a startlingly new phenomenon, because especially in the high-net-worth space, relationships with financial advisers are usually decades in the forging. But now their "money is in motion," says Ed Keohane, managing director of Scotiabank's Private Client Group. If re-evaluation means throwing their current adviser overboard, so be it.

Some advisers are benefiting handsomely from this tectonic shift. Rick Smerchinski, a Waterloo, Ont.-based vice-president and portfolio manager with HSBC Securities (Canada) Inc., was surprised during the downturn to pick up four new high-net-worth clients with a combined $5-million in assets.

Toronto financial planner John De Goey is finding the same: In the fourth quarter of last year, when markets were testing new lows, he welcomed a handful of new high-net-worth clients. "It was totally unsolicited," marvels Mr. De Goey, a vice-president at Burgeonvest Securities who handles the portfolios of about 70 families. "I never contacted them, never even heard of them. They just phoned me up and said, 'I think we need to talk.' "

Other advisers, though, might be facing a time of reckoning. For those who have overseen subpar returns, taken on more risk than the client was comfortable with, communicated poorly or not at all, or benefited unduly from high fees and commissions, relationships are facing the guillotine.

"Many advisers are just hiding out right now," says Warren MacKenzie, who once had to repair a portfolio-from-hell stuffed with more than 90 mutual funds. "They're hunkered down, and have stopped going to their churches and country clubs. What are they going to say?"

Their competitors, of course, will be only too happy to absorb the business.

"The competition is absolutely fierce, no doubt about it," says Alois Pirker, a senior analyst and wealth-management expert at Boston-based consulting firm Aite Group LLC. "Wealthy clients have a lot of choice, and in times like these, firms will bend over backward to get their business. It's a very good position to be in, because at that level almost everything is negotiable, all driven by how much money is at stake."

The adviser as personal CFO

At the million-plus level, it's not just investment advice that's being offered. The array of services offered to high-net-worth clients by private banks and family offices can be breathtaking: not just estate planning, the setting up of trusts, or preparing your personal tax returns, all of which have become almost automatic.

These days advisers are like all-around life concierges, and might arrange to appraise your art collection, set up care for your elderly parents, or give your kids lessons in financial fluency. In short, they'll do everything short of walking your dog.

Why so accommodating? Because the number of Canadian millionaires is dwindling, thanks to the carnage in the stock markets, and advisers are holding desperately to what they've got.

At the worst of the crisis almost half of the world's wealth was essentially wiped out, according to Stephen Schwarzman, the CEO of private-equity shop Blackstone Group. By the end of 2008, that number of millionaire households in Canada - those with at least a million in investable assets, excluding real estate - "fell by 70,000 as a result of the market turmoil and the erosion of asset values," says Keith Sjogren, research director with Toronto-based consulting firm Investor Economics.

Those high-net-worth (HNW) investors who remain are key profit centres for Canadian institutions. Thanks to the wide array of custom services that millionaires need, and the fees they generate compared with typical investors (with portfolios often including pricey alternative investments like hedge funds), banks will likely decide to focus on wealthier and wealthier clients, predicts Mr. Sjogren. For financial advisers specifically, many of whom earn their living by slicing off a percentage of those now-reduced assets, the millionaires who remain are key to their survival.

Indeed, moneyed Canadians can feel like chum in the water.

"It's probably the most competitive space on the planet," says one Toronto-based multimillionaire philanthropist. "I get a surprising number of unsolicited mailings, investment managers mailing me their quarterly results, invitations from people I've never heard of at large banks to go to their seminars, phone calls from bucket shops in the bowels of New Jersey," he says.

"I even had one fellow come aggressively at me the last 18 months, sending me weekly e-mails complete with PowerPoint presentations. He thinks he's my best friend."

That kind of aggressive poaching isn't surprising, given the expansion of wealth management in Canada in recent years. HSBC, Citi, UBS and other foreign-based institutions all charged into the sector, lured by a formerly robust economy and the multiplication of the so-called "mass affluent." After all, according to Capgemini and Merrill Lynch's World Wealth Report, the number of Canadian millionaires had grown by a healthy 10.4 per cent from 2006 to 2007.

The post-apocalyptic market has trimmed their ranks, of course (a WWR spokeswoman deadpans that the drop has been "significant"). But for those who remain, Grant Rasmussen would like to bring every single one into the fold.

The president and CEO of UBS Wealth Management Canada, Mr. Rasmussen oversees a practice that has doubled in Canada in the last five years (despite UBS' web of subprime-related troubles). "The big Canadian banks do a great job with the little things, like checking accounts and ATMs," says Mr. Rasmussen, an RBC veteran himself. "But with us, three-quarters of all UBS employees around the world work specifically in wealth management."

Mr. Rasmussen claims his crew hasn't had to do much active poaching, since they fielded more than 1,100 inquiries during the plunge from "disappointed and scared" clients from other firms.

The poker ante is somewhat higher at UBS, with HNW clients classified as more than $2-million in assets, and so-called "key clients" starting at $50-million. One technique Mr. Rasmussen employs in the courting process: a flood-the-zone approach, like when one new $200-million client in Toronto was met by not only his adviser but by six other experts (including the CEO himself).

"They felt their current provider was not giving them enough resources," chuckles Mr. Rasmussen. "So we sent a message."

Global reach is one way UBS, HSBC and Citi try to lure HNW clients. Thinking about giving up life as a corner office drone, and buying a rustic vineyard somewhere in Tuscany or Bordeaux? Mr. Rasmussen's wine banking group will clue you in on the best regions and best values. For the more altruistic, his philanthropy group will help you set up a personal foundation to distribute your largesse around the world. Or do you just want to hold some securities in foreign currencies, like the Swiss franc or Thai baht? Consider it done.

Advisers come a-courtin'

In short, the high-net-worth game in Canada has changed. Investors, including Jay Taylor, are kind of bemused by all the attention they're getting.

The owner of Morty's Pub in Waterloo, Ont., Mr. Taylor has had his money with HSBC for about a decade. But in a relatively small community like Waterloo, there are "seven big competitors, all of whom have built massive new offices in the last few years," says Mr. Smerchinski, his adviser. "This industry is way overcapacity, even as assets have shrunk and adviser revenues are down by 30 to 40 per cent."

That means Jay Taylor isn't enjoying much peace these days. From random phone calls to advisers foisting their contact information on him at the pub, he's surprised at the aggressive turn things are taking.

"Everybody's stepped their game up in terms of poaching," says Mr. Taylor, who took over the business from his father. "In this economy, everyone's more willing to show their business card than they would've been two years ago. They even claim they'd bring in 100 different experts to help me out."

Financial advisers know that key clients like Mr. Taylor are prime targets in volatile periods, when they can lose a big chunk of their wealth in a matter of months. Mr. Taylor himself sunk by about a quarter (though he's since made up much of that ground).

As such, smart advisers are taking pre-emptive action. That means more face-to-face meetings, inviting HNW clients to seminars, retooling old portfolio plans that have blown up, or having branch managers or international experts in for private chats about what's going on in the markets. HSBC's Mr. Smerchinski, for instance, has taken to writing personal letters in advance of account statements, to soothe clients over the market's wild gyrations.

Toronto's Jane Haberbusch is one of those high-net-worth Canadians benefiting from her adviser's full-court communications press. As director of human resources at energy firm Enbridge, she and husband Glen Thorne had seen their portfolio fall by about a third during the worst of the market freefall. Through it all, thanks to adviser John De Goey, "the communication has been fantastic," she says. "As things started to go south last fall, we got lots of e-mails, updates and performance information. I was even on assignment in Western Canada for six months, and he'd call me out there to talk about strategy and rebalancing."

As a result, Ms. Haberbusch stayed put - even though her bank dropped hints that it was ready and willing to assume her whole portfolio.

That jibes with the findings of Angus Reid Strategies' Wealth Management Index, which found that the number of annual adviser contacts is the main key to client satisfaction. Among million-plus investors, satisfied clients had an average of 18 annual contacts; dissatisfied clients, an average of just five.

It's not only high-net-worth clients who are being aggressively courted these days, though. Advisers themselves are the target of sweet inducements, because of the multi-million-dollar client lists they manage.

Much like Hollywood talent agents who jump from agency to agency, and take their rosters of A-list celebrities with them, elite financial advisers are sometimes paid handsomely to jump ship.

"The signing bonuses can be huge," says Oliver Wyman's Arjun Saxena, who points out elite advisers can sometimes bring in north of a million dollars a year for their employers. "They can be up to 150 to 250 per cent of your previous year's revenue production. So you're basically getting years' worth of salary up front."

A caveat: The victimized institution might not take things lying down. The most shocking story that Second Opinion's Warren MacKenzie has come across: When a prominent adviser at one firm jumped to a competitor, his old clients were told that he'd suffered a nervous breakdown, unable to perform even the simplest tasks.

"It was one of the meanest tricks I ever heard, and absolutely untrue," he says.

Industry shakeout changing the game

Ironically, the market dip could lead to some big winners in the high-net-worth advisory space. After all, many U.S. and European institutions have become the butt of bitter jokes. Some are entangled in complicated post-bailout relationships with their governments, and smaller independent advisers are flirting with extinction.

"Canadian banks could end up as the winners here," says Investor Economics' Mr. Sjogren. "They've been held up as paragons of virtue in this mess, they're seen as more stable than their independent competitors, and they could attract advisers and high-net-worth households as a result."

For boutique advisory shops in particular, even the loss of a single client is keenly felt. That's why advisers such as Sloan Levett have stepped up their game - even answering client questions on his BlackBerry at 1:30 in the morning, if necessary.

Mr. Levett leads the wealth-management practice of Toronto accounting firm Fuller Landau, looking after about 20 clients, each with assets in the millions. He's no newbie to a rarefied clientele, having previously managed the finances of a member of the Thomson family. It can be tough to fend off the giant banks - "the big folks often try to poach our clients," he says - but his competitive advantage is that he doesn't have a vested interest in selling particular products. While institutions often have an incentive to steer you into specific funds, "we're objective, and that's our differentiator."

Indeed, in a down market where every penny matters, traditional fee structures - charging a percentage of assets, and/or commissions for buying particular financial products - are being heartily questioned. Such fee-only advisers as Second Opinion's Mr. MacKenzie are seeing a bump in business, and the idea of salaried advisers is gaining traction.

"We have a problem in wealth management in Canada," says UBS' Mr. Rasmussen, pointing out that his advisers work on a straight salary and bonuses instead of commissions of any type. "Advisers charge a lot more to be in risky equities, to get into 2-and-20 hedge funds, to be constantly trading. They don't make anything if you sit in cash and fixed income, and then people wonder why they get such horrific performance."

In addition to being product-agnostic, Sloan Levett and other advisers seem willing to let the professional bleed into the personal. He's become part financial pro, part trusted adviser, and part on-call psychologist: If clients have issues with their significant others or their kids, are musing about whether to buy or lease a car, or just need the name of a fabulous restaurant, they ring him up.

"One even handed me a picture of his daughter and asked me if I knew anyone to set her up with," he remembers. "I said I'd try."

His clients, including Michael Mayzel, prefer that intimacy of having a "personal CFO," rather than getting lost in the wealth-management arms of the big banks. He and a partner headed up a company that owned the rights to the popular Lowepro camera bags, and sold the firm in 2005. Faced with a big chunk of cash and no idea what to do with it, they took meetings with a number of private banks. "It was pretty entertaining," he remembers. "I was sitting in a boardroom, and they brought in no less than 15 people. I had no idea so many VPs existed. But it wasn't really my style."

And there's the rub: Every high-net-worth client is essentially a million-dollar puzzle, looking for something specific to them, and potential advisers have to unlock what that is.

These days, what they're usually hungriest for is simple trust. Not only are their massive portfolios facing reconstruction, but so is a fundamental conviction in their financial advisers - indeed, in the entire Madoff-tainted, AIG-entangled financial system, which has hardly proved worthy of investor faith.

"You meet a lot of happy, smiling people when they want your money," admits Claremont's Ross Smith, who plans to bring in Second Opinion's Warren MacKenzie to monitor the horse race between his newly chosen advisers.

"But right now no one really seems to know anything. I just want someone to tell me the truth."

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