When life throws clients a curve ball, financial advisors need to do much more than watch from the stands. Anticipating challenges is central to a client’s game plan.
“Part of the purpose of good financial planning is to be ready and prepared for the unexpected,” says Ron Fox, chair and CEO of Glidepath Portfolio Services Inc. in Toronto. Advisors, he notes, help clients “build and keep all aspects of their financial house in order so that it has a strong enough foundation to withstand any events.”
Even for clients who are not near retirement, preparing for the unforeseen – job loss, divorce, illness – is essential. That starts with a conversation, and those discussions can be difficult, says Michelle Munro, director of tax and retirement research with Fidelity Investments Canada ULC in Toronto: “We are talking about uncomfortable scenarios. This goes beyond a standard checklist of what an advisor would talk about.”
Opening the door to uncomfortable topics benefits both you and your clients, she adds: “You are not doing your clients any favours by not discussing these issues. You want to be your client’s first point of contact for financial help.”
Munro recommends you frame the conversation this way: explain to clients that your role is to help them if life goes as expected – and if it doesn’t. Munro notes that after she gives talks on financial planning, she often is approached by women in their 30s looking to understand the financial implications of divorce. “They want to be prepared, to have a contingency plan,” Munroe says.
Any contingency plan begins with building in financial safeguards. David Gorveatte, a certified financial planner in Fredericton with Quebec City-based Investia Financial Services Inc., suggests clients take out a home equity line of credit as a potential source of money should a worst-case scenario become reality.
“Most home equity lines of credit have little or no cost to hold if not being used, and only come into play when crises happen. It’s very hard to get a home equity line of credit when you’re unemployed or sick, so [clients should] have it in place in advance.”
Gorveatte also puts some of each client’s money into a conservative investment in anticipation of life’s adverse events: “I believe in diversifying a client’s portfolio into at least five categories, as one will always be doing better than the other four. And [the leading category] is always the one we draw from first.”
Because the impact of a crisis depends on individual circumstance, a cookie-cutter approach won’t work when planning for future pitfalls. A contractor, for example, may have a revenue stream that ebbs and flows; this must be built into the financial plan. Women are more likely to take a step back from their career than men are if a child becomes ill. That affects the woman’s annual income and requires thinking through the long-term implications of stalling a career during the peak earning years.
“A retirement plan is not a plan that is implemented or analyzed in a silo without considering the client’s full personal, family and financial contexts,” Fox says.
Munro agrees: “There is no ‘one size fits all’ [solution]. Advisors need to be able to adapt.” She says you can tell clients: “You’re saving for the long term, but perhaps you need to save for the short term as well.”
Whether reacting to unexpected events or proactively planning, Fox says, each situation should be assessed through six financial planning lenses: asset management; risk management; tax planning and optimization; retirement planning; financial planning; and estate planning (including the financial implications of business and family law).
When the unexpected becomes reality, the first recourse should be to assess what options, if any, clients have with their employers, Gorveatte says. Clients may be eligible for disability benefits, and should document every cost for possible insurance or tax deductions. “Review [clients’] employees’ group handbook with them,” he says, “and also any other employer benefits.”
Converting a client’s group life insurance to an individual policy upon retirement also may be important, Gorveatte adds, and there is usually a 30-day time limit to do so without a medical.
Planning for the unexpected means that there should be no surprises, says Munro. She recommends ensuring regular contact with clients, including an annual meeting: “Inquire about the family – and explore the implications. It’s all integrated.”IE