How advisors can help Canadians overcome false sense of security

Research suggests lack of attention on emergency planning as households fixate on another problem

How advisors can help Canadians overcome false sense of security

With all the financial challenges that Canadian households face, it’s hard to imagine that they could be overly confident about their finances. But that’s exactly what a recent study from Edward Jones suggests.

According to new research the firm released in time for Financial Literacy Month, 47% of Canadians are uncomfortable with the current state of their finances. Still, 57% expressed a belief that they’re stable enough to weather unplanned expenses such as a job loss, car repairs, or an unplanned child.

On the face of it, the results show a fair amount of financial confidence among households in Canada. But those answers could be hinting at something else: a false sense of security, and possibly even denial.

“I think it’s not unusual for Canadians to not want to consider unexpected emergencies,” said David Gunn, the country leader for Edward Jones Canada. “They’re already facing a lot of difficulties, so there’s a natural tendency to avoid or delay thinking about these types of events.”

According to Gunn, the increased vulnerability among Canadians is clear from the 45% increase in the average household debt since 2005. The Bank of Canada has also hiked the benchmark interest rate by 1.25 per cent in the last two years. The upshot: the costs of debt have grown much faster than household income, leading to a focus on debt payment.

“In our survey, we found that 37% of Canadians are devoting at least a quarter of their annual salary to paying down their personal debt, including credit cards and lines of credit,” Gunn said. “Meanwhile, the household savings rate among Canadians is the lowest in nearly six decades at 1.7%, according to Statistics Canada.”

Taken together, those numbers suggest that a significant number of households have become overly fixated on debt; by overlooking savings, they run the risk of not being able to pay for unexpected expenses themselves, opening the door to even more borrowing down the road. For that reason, it’s best to take a critical look at one’s financial situation to determine whether it’s better to prioritize debt repayment or savings.

“That’s where an advisor can make a substantial impact,” Gunn said. “They can work with a client to construct a holistic picture, apply a stress test, and determine the best way to align their priorities.”

One risk for unadvised households comes from an overreliance on rules of thumb. For instance, despite the commonly cited rule of setting aside three months of one’s salary as an emergency fund, it actually varies depending on several factors, including the number of income earners in the household and how stable their jobs are.

Too many workers also tend to take their work-provided coverage for granted. While their employers may provide group plans that cover job loss, disability, or critical illness, it’s worth giving those perks a good, long look to determine if there’s any need to get supplemental insurance coverage.

“Investing is another area where advisors provide valuable guidance,” Gunn said. “The simple rule of 72 tells us that someone who invests in something that earns 1% a year will double their money in 72 years. But a lot of clients we’ve seen put their long-term investments in very, very low-risk accounts that earn minimal interest; they don’t realize how much time and opportunity they’re losing.”

Gunn also highlighted the importance of keeping risk in check by keeping an eye on investor risk tolerance. During periods of positive stock-market returns, investors’ appetite for risk can slowly creep upward; by doing annual reviews and asking clients to consider different scenarios and simulations, advisors can coach clients and talk them back to their normal levels of conservativeness.

“We’ve found that 66% of Canadians are not getting the advice and coaching they need because they’re not working with a financial advisor,” Gunn said. “For those who aren’t working with a financial professional, we urge them to consider visiting with two or three different financial advisors to find the right fit: someone they can trust, someone they’re willing to share details of their finances with, and someone who can understand and help them achieve their short-term and long-term goals.”