The debt drain

StatsCan figures confirm that households with more than $100,000 a year in total income account for a good chunk (37%) of Canada’s consumer debt. And that means advisors serving these middle-tier households are likely to be heading toward their own version of a debt “crisis”: clients reaching their maximum debt levels to finance homes, vacations, cars – and investments.

“I’ve had clients say that they almost feel it would be irresponsible of them not to take advantage of the low rates and borrow to invest,” says Karin Mizgala, CEO of Money Coaches Canada Inc. in Vancouver. Leveraging to invest makes perfect sense on paper, Mizgala says, but it doesn’t take into account the complexity of investment vehicles and the financial literacy of the typical investor.

“[Leverage] can be a very difficult and dangerous strategy for most people,” she says, “because they don’t have the wherewithal to manage the full gamut of their financial affairs with an awareness of the implication.”

Canadians’ growing comfort with debt is something that advisors need to help manage. Kris Dureau, certified financial planner with Investment Planning Counsel Inc. in Burlington, Ont., says few advisors delve deep enough into their clients’ debt profile. As a cash-flow specialist who works with clients with incomes of at least $100,000, Dureau is familiar with the tribulations of overextended households. “I’ve had couples crying in my office,” he says.

Dureau says it’s not unusual to see families stuck in “consolidation hell,” using loans, often secured by housing assets, to wipe out high-interest debt, only to turn around and jack up the credit cards again. “I have clients who have done it two or three times,” he says.

Debt and release

This debt-and-release cycle is all too common, says Laurie Campbell, CEO of Credit Canada, a non-profit credit counselling agency based in Toronto with several locations in Ontario. “We are seeing people who are professionals coming in here all the time,” she says. “Homeowners with out-of-control debt.”

Many of these individuals, Campbell says, are in or near their retirement years. They often hit a wall when they apply for more credit – sometimes to do the “right” thing by consolidating – and are rejected.

When clients reach this critical turning point, someone like Dureau can offer help. He develops a cash-flow plan for clients but his main focus is working with them to help change behaviour, as that often is what got them into trouble in the first place.

Dureau scoffs at some of the old-school debt remedies, such as getting clients to track their spending for a month, which he considers a complete waste of time. This strategy might make people feel good, but all it does is track history – the cause of the debt problem, rather than a solution.

Dureau prefers a plan that breaks out fixed expenses (including debt repayment and savings.) What’s left is assigned to discretionary spending (food, entertainment, clothing, etc.). Clients have to work within those parameters by sticking with a cash-only strategy. He wants his clients to reconnect physically with their money so they don’t fall back into what he calls “blind spending,” tapping their debit or credit card at a several retailers without giving it a second thought or justifying the use of a credit card for “loyalty points.”

Part of Dureau’s service is just being available in those critical moments when clients are fighting off the temptation to fall back into debt-compounding habits. He has had clients call when confronting decisions on things such as unexpected car repair bills or trips overseas to visit a dying relative.

Sometimes clients just want to share their revelations as they go down the debt-reduction path. One client, for example, called Dureau recently to tell him about an experience at store in which the client was standing in line with two shirts but, glancing at the cash in his wallet, decided one would suffice.

Dureau likens debt reduction to the challenges faced by people trying to improve their physical fitness: small decisions (take the stairs, shun the pastry) add up to great change. Dureau says his work is gratifying because he sees the anxiety about money dissipate as clients gain control of their spending.

Further, Dureau, in helping a client during this critical time, is setting the stage for a long and loyal relationship when the client is in a comfortable position to invest.

Not every advisor is interested in that level of attention to the minutiae of clients’ cash flow. “I’m not a hand-holder,” says Blaine Conrad, an advisor with Ramey Investments Inc. in Dartmouth, N.S. Conrad says he has seen a genuine shift in attitude toward debt among his clients since Canada’s most recent recession.

“Pre-2008,” Conrad says, “people were more laissez-faire with their debt concerns compared with today.” Now, when he crunches the numbers for clients to show them what they will have available each month after they retire, they pay attention. “It’s a wake-up call,” he says.

Although there are a great many Canadians who are mortgage-poor – dipping into the equity in their largest asset to fund their lives – Conrad argues, people with advisors tend to be in a different class in the saving vs spending struggle. He points to the very fact that these clients are working with a financial professional and, therefore, already are taking steps to manage their financial future.

What concerns Conrad these days about debt is clients who choose to take on extra responsibilities late in life that can offset retirement plans.

Boomerang kids – those adult children in their 20s or even their 30s who return to the family home and live rent-free – are posing more of a threat to the financial well-being of several of his clients. That situation creates a more insidious leak to household finances than debt, which his clients are accustomed to monitoring. (For more on clients’ adult children, see story on page 22.)

The good news for advisors serving younger clients is that this demographic doesn’t carry nearly as much debt as their older counterparts, largely because many young people are not yet homeowners. However, many young people also are not at the top of their income-earning game, so eliminating the debt they have can be difficult.

But this situation can all work in their favour. Lindsay Kilgour, an advisor with Investors Group Inc. in Sudbury, Ont., notes a generation gap in comfort with debt – and this attitude may surprise people who malign the younger generation for financial irresponsibility.

“Older clients tend to have the view that debt is OK,” Kilgour says. “They tend to be the ones that you have to give more of a push to get it down. They don’t think it’s a big deal.”

Conversely, Kilgour says, her younger clients are hyper-aware of the debt they carry, she says. In many cases, they have seen their families struggle with debt and don’t want to go down the same path. “Twenty-five-year-olds know exactly what they owe, to the penny,” she says. “The older generation rounds down.”

Understanding the complex emotions you may encounter when helping your clients deal with debt is important, says Campbell. Embarrassment can run deep for the debt-stressed. Money, as the final frontier of private matters that should never be discussed in public, she says, is fraught with emotional conflict.

“You can blame your sex life on your partner and your work problems on your employer,” Campbell says. “But with money, you have to take personal responsibility.”

Encumbered by shame

In fact, Campbell adds, her agency has dealt with several clients who were so encumbered by shame that they wouldn’t reveal their whole financial picture to their advisors. “They come in here and unload for the first time,” she says, adding that despair and panic are par for the course among her clients.

Mizgala confirms that having to tease out a declaration about a client’s various debts is not unusual. And spouses with different approaches to financial matters can complicate things further, especially in cases in which one partner is not fully aware of the extent of the debt situation.

So, as an advisor, you need to reserve judgment and make sure that your clients feel comfortable in revealing the good, the bad and the ugly about their debts before making any investment decisions.

Campbell says you can underscore the fact that many Canadians are going through similar challenges: “People need to know they’re not alone. They want to feel normal.”

And let your clients know that there are always solutions. The most important thing you can do to help debt-stressed clients, Mizgala says, is to help them build a vision and develop some goals so that there are concrete reasons to refrain from returning to bad habits: “We spend a lot of time talking about their dreams – what they’re hoping to achieve in life.”

If getting into the nitty-gritty of budgeting isn’t in line with your business model, refer your client to a non-profit credit counsellor. (Be wary of any operating under a profit model.) Campbell says that many clients who seek Credit Canada’s assistance also work with advisors.

Financial literacy

You can help to tackle your clients’ current and potential debt problems, even if you work with high net-worth clients, by promoting financial literacy. That’s because financial illiteracy is at the root of debt, according to Tracy Theemes, an advisors with Sophia Financial Group, which operates under the Raymond James Ltd. banner in Vancouver. Theemes works with clients with $1 million or more in investible assets, clients who generally do not suffer from debt shame. However, every year, she does pro bono work for more than 100 Canadians – both impoverished and middle-class – in which she covers debt and its implications.

With a background in social work, Theemes is acutely aware of the intense feelings wrapped around money and debt – and, she says, it’s all about camouflage: “Everybody is pretending. The rich are acting poor; the poor are acting rich.”

This lack of authenticity makes the debt situation more complex, as it’s a breeding ground for misinformation and bad decisions.

Advisors of high net-worth clients, Theemes says, as the promoters of financial literacy, should look outside their clientele and find a way to help Canadians open up about their finances.

“People with your brains and abilities are working with the easiest group,” she says. Taking a half-day a week to help people who don’t think they can afford an advisor or financial planner would help improve financial literacy immensely in this country.

Further, Theemes adds, seeing the breadth of other Canadians who – through bad luck or mismanagement due to ignorance – are struggling with debt can only make for a better informed advisor.

For more on helping clients manage debt, see story There is life after bankruptcy.

© 2015 Investment Executive. All rights reserved.