Advisors can play crucial role in ensuring clients have emergency savings

The importance of having emergency savings is a conversation that financial advisors need to consider having with their homeowner clients, especially as a report from Toronto-based Manulife Bank of Canada released on Thursday shows that advisors play a pivotal role in ensuring these clients are ready for unexpected expenses.

The report, based on Manulife Bank’s bi-annual debt survey, reveals that 38% Canadian homeowners have experienced a situation in which they did not have enough money to cover their housing expenses even though 73% believe they’re somewhat or completely prepared to deal with an unexpected expense.

However, the survey found that less than one-quarter (24%) of Canadian homeowners have more than $5,000 set aside for an emergency and half of survey participants say they either have $1,000 or less or are just simply unaware of how much they have set aside for emergencies.

Both homeowners who work with an advisor and those who do not were surveyed, with the latter making up 44% of respondents. Those who work with an advisor were found to be in better financial shape, with only 17% having increased their debt in the past year compared with 22% those who are not working with a financial professional.

Four-fifths of respondents with an advisor indicated they feel somewhat or very prepared to deal with an unexpected expense as opposed to 65% of those without an advisor. Specifically, those with an advisor have more “rainy day” savings, with a median of $4,500, than those without an advisor, who have median savings $2,000.

The interesting factor within this comparison is that respondents in both groups had the same median level of income ($85,000), notes Rick Lunny, president and CEO, Manulife Bank, in a statement.

“It’s very difficult for people to individually have the knowledge and self-discipline to manage their debt, get out of debt or be prepared for unexpected expenses,” he explains, “but if they have the discipline to have a financial advisor, you can see that coming through in both their confidence and their ability to weather these unexpected expenses.”

The survey also asked those who had difficulty paying for an unexpected expense over the past 12 months how they resolved the situation. One-third (33%) accessed a line of credit, 32% carried a balance on a high-interest credit card, 23% had some emergency savings set aside, and 14% borrowed money from a family member. Other options included withdrawing money from an RRSP (5%), selling investments (5%) and accessing money through a payday lender (4%).

It’s poor financial planning when Canadians are cashing in investments when there are better options available, says Lunny. This is another area in which advisors can provide expertise on those choices.

Canadians were also asked about their mortgage debt. Almost three-quarters (71%) of respondents have a mortgage, with the average mortgage debt landing at $175,000. Regionally, Albertans reported the highest average mortgage debt, at $238,000, and British Columbians came in second, at $228,000.

Environics Research conducted an online survey of 2,372 homeowners between the ages of 20 and 59 with a household income of $50,000 or more across Canada from July 22 to Aug. 7 on behalf of Manulife Bank.