Financial services leader advocates back-to-basics approach to help clients navigate challenging debt realities
As more Canadians succumb to debt-related financial stress, advisors have an increasingly crucial role to play by focusing on financial fundamentals.
That’s the word from Danielle Hollingshead, wealth services supervisor at Synergy Credit Union, who’s seeing the impact of rising rates trickle down to an increasing number of clients in real time.
“I really do believe that financial wellness is a big part of overall wellness. Those two things are deeply intertwined,” Hollingshead told Wealth Professional. “When we have folks who maybe have a less-than-ideal financial situation, we know it can lead to considerable stress.”
Referring to the latest FP Canada Stress Index survey, Hollingshead notes 40% of Canadians cited money as their biggest source of stress, beating out jobs, personal health, and relationships. An extended period of elevated stress, she adds, could negatively impact a person’s overall wellness; in some of the worst cases, they can turn to unhealthy coping mechanisms such as substance abuse, which could have additional negative consequences on their finances.
“The overall wellness or a person's health is really important to consider when creating your financial plan,” she says. “We know that your health could have a significant impact on that bottom line. if you haven't taken the steps to manage your financial risks of a possible illness or disability, it can really have a negative effect.”
Rate pressures leading to tough debt decisions
The past year and a half has seen a seemingly relentless upward march in interest rates, leading to drastically higher borrowing costs for countless Canadians.
While recent declines in the CPI represented some good news for the Bank of Canada’s fight against inflation, that good news was dampened by the contribution of mortgage costs, which accelerated by 30.6% in July according to Statistics Canada. The fact that headline inflation bounced back up to 3.3% that month, above the central bank’s target range, is another setback for those hoping for rates to settle down.
“Lots of our clients are renewing their mortgages, and the current rate they're renewing it at is close to double what they were paying recently,” Hollingshead says. “We also have no clear picture of when those rates may go down.”
For many borrowers renewing their mortgages, it can be overwhelming to see the new debt payment amounts they’ll have to come up with every month. Those larger mortgage payments, Hollingshead notes, only compound the budget squeeze many households are already facing as a ubiquitous rise in expenses forces them to make tough spending decisions.
“This is particularly true for clients who have perhaps in the past maybe overused credit a little bit to pay for some of those budget items, because the debt was just so easily serviceable,” Hollingshead says. “We're seeing people actually have to extend the life of their mortgages just to service the debt they already have, and that really could lead them into carrying debt in retirement.”
It’s not just current debtholders who have to be worried about rising interest rates. Hollingshead says she’s also seeing young people who are at the threshold of milestone purchases – their first home, or their first car – and agonizing over whether they should push through.
“They may be thinking about getting a new car, and the payment is at a higher interest rate than they expected … Do they delay out that purchase? Or do they cut something else out of their budget?”
Drawing a line on clients’ debt use
To help ease clients’ debt-related worries, Hollingshead says, requires a back-to-basics financial planning approach. That begins with a thoughtful conversation about financial goals and objectives, including a discussion of what financial wellness means to them. For some clients who aren’t used to being financially fastidious, it may be necessary to go through their current expenses and payment together as well.
“I also think an important strategy is just to discuss what extent we're going to be using debt,” she says. “Leveraging debt to further yourself towards your financial dreams, like a house purchase, is one thing. But if a client has to use a credit card as an emergency fund, that can cause a lot more stress.
“We know debt isn't necessarily bad, but we need to have a good relationship with it,” she says. “As an advisor, we can have a good conversation about the type and the timing of debt that makes sense in the financial plans, so clients can avoid the stress that comes with it.”
In cases where a client’s income has increased relative to their monthly expenses – for example, if they’re working from home and no longer paying for daycare – financial advisors should also examine how to use those extra funds, including paying down potentially high levels of debt.
“A lot of people used to be able to easily out-earn the interest rate they were paying on their debt,” Hollingshead says. “It's really a time for review with our clients, if there should be any major changes made to existing strategies that we created during a low-interest rate environment as well.”
Between travel, paying for full-time daycare versus after-school care, and renting campers and boats, among other things, summer tends to come with a large price tag. Between those and the back-to-school activities, it can also be very tempting for Canadians to reach for their credit cards. In those cases, she says advisors play a vital role in helping turn clients’ focus toward the essentials.
“The unfortunate part of an advisor’s job is having those tough conversations to keep clients accountable. Some clients may have a desired lifestyle that’s just not possible for them in our current economic conditions,” Hollingshead says. “We should be making sure our clients understand how debt affects their net worth, and their cash flow, and the ability to reach their financial goals. … I think that's just as important as reviewing the investments in their portfolio.”