How clients can benefit from rising CPI rates triggering a financial review

'Advisors need to lead with advice, not a sale to help clients through this challenging time', says advisor

How clients can benefit from rising CPI rates triggering a financial review

Yesterday’s Canadian consumer (CPI) index increase to a 39-year high of 8.1% wasn’t a surprise, but advisors should help their clients brace for even more increases before this trend is spent, says one advisor.

“I wouldn’t be shocked if we get another 2% increase. I’m not saying it will happen in one go, but I fully expect it to keep going up. Look what’s going on in the United States, which is a gas-operated economy and it’s importing a ton of gas. We know that if the U.S. gets a cold, Canada gets pneumonia,” Elke Rubach, president of Rubach Wealth Holistic Family Advisors, told Wealth Professional.

When Statistics Canada released its June 2022 CPI rate yesterday, it had climbed from 7.7% in May.

Much of the increase was due to gasoline prices increasing by 54.6% since last June, but seven of the CPI’s eight major components had also risen by 3% or more in that time. That included food, household operations, furnishing, and equipment, clothing and footwear, health and personal care, and recreation.

The passenger vehicle index rose by 8.2%. Service prices climbed 5.2% year over year in June. Travel costs also rose, with accommodation 49.7% higher year over year and air transportation rising 6.4% month over month since May. Prices also rose more in June than in May in all of the provinces except British Columbia and Prince Edward Island.

With clients being squeezed in almost every direction, Rubach expressed particular concern for those who may have to renew their mortgages in five years, when they may have just qualified now. Given that interest rates could climb to 8% from the 1.2% that they may have just qualified for, and incomes not keeping pace with that, she said, “people need to get in front of that. Don’t let it become a problem or you could be in trouble in four or five years.”

Rubach encouraged advisors to dust off the financial plans that they’ve already done with their clients or create those to help their clients get a solid financial picture of their income, expenses, and goals, and how all of those fit together. If there are challenges, such as renewing a mortgage at much higher rates later, it’s time to help them consolidate and make the essential choices now before they risk losing their credit-worthiness, which could force them to sell their homes.

“Clients need to have a plan to understand the implications of their decisions,” said Rubach. “A plan doesn’t mean sacrifice and torture. It means you know where you’re going and how things fit together.

“It’s an awareness exercise. People need to know where to exercise discipline. Talk to the family,” she said. “If the kids are used to three camps a year, after-school activities, and a new bike every year, they may need to look at that. Besides, try finding a new bike right now. There are no bikes!”

Reviewing clients’ financial plans with them now would allow them to review their cash flow. Where is the money coming from? Do they need a secondary revenue stream? Should they ask for a pay increase– or start a new business? Is everyone in the family being disciplined about expenses?

“They need to know how to live within their means and understand how they can pay expensive debt first, and then you need to run different scenarios for the next three, four, or five years, so they know they can weather the worst-case scenarios,” said Rubach.

Rubach is concerned that some of the CPI elements that are increasing could become entrenched. That includes housing and wages, though Russia’s continuing war on the Ukraine could continue to impact wheat and, thus, food prices, too.

Finally, Rubach, who charges for her services, said the increasingly challenging environment that clients are facing means that advisors need to be advisors and not just salespeople.

“You can’t make a recommendation until you sit down and educate your client. Then, you’re making your client responsible for their decisions, and you can develop a plan and your rules of engagement,” she said. “But, you have to lead with advice and not a sale. It’s very easy to tweak the financial plan to position the sale , and that’s not cool.

“The financial plan doesn’t have to be six pages and incomprehensible because people are not going to follow it. So, cut the BS out and explain what you’re doing and the implications of it. Keep it simple and make sure they have a will and tax plan, too. Ensure they know their options and are being disciplined because that is the key.”