In light of all the changes caused by COVID-19, our CEO, Stephanie Holmes-Winton, spoke with advisors and answered their questions on how they can help their clients:
Q: How should we manage requests from clients who want to cash out their investments because they are worried about losing their job?
Notice how they are worried about losing their job, but it hasn’t actually happened yet! Right now, many people are feeling a little lost, a little insecure, and like everything is out of their control. Hoarding cash or pulling their investments feels like something they can control. Talk to your client about safer options they should do first, like reducing their spendable or using revolving credit. Cashing out investments should be a last resort. However, remember that they shouldn’t alter their cash flow plan unless they need to because of lost income.
Q: I’m worried about my clients who own small businesses.
Small businesses should reach out to their banks to assess their credit options as early as possible. Many institutions are also offering postponement programs, which could benefit your client. On the personal side, pausing long-term savings could enable them to reduce their income or their withdrawals from the business. Business owners with a cash flow strategy should also have access to emergency savings that they could use. However, these clients should only use their savings if they’ve exhausted all other options.
Q: Have you heard of any strategies for clients drawing down on a LOC in case the banks recall unused portions?
I haven’t heard of people doing this, nor would I encourage it. Firstly, clients would have to service the cost of that debt from their current cash flow. Secondly, it’s much easier to spend cash if they move it to their bank account than it is when it is in a separate line of credit. Thirdly, many people doing this would make our communities look more indebted than they are, which could cause the banks to become more restrictive. Ultimately, it’s highly unlikely that banks will start calling for unused portions of LOCs. If anything, banks are highly motivated to make sure that people have access to the credit they need right now.
Q: Given the circumstances, should clients be paying the minimum payment on their debt right now?
If a client’s income has dropped, it’s prudent to drop down as low as minimum payments; however, that reduction should match their reduction in income. If they drop to minimum payments before it's necessary, they will most likely burn through the extra money much faster, whether they truly needed it or not. Also, depending on the client, you could adjust their spendable! If they don't have much for expenses right now, reducing their spendable could be a useful way to fill some of that gap.
Q: Should clients stop taking income from Retirement Income Funds (RRIFs)?
The government has officially reduced RRIF withdrawal minimums by 25% for 2020; however, advisors should first assess their client’s cash flow. If a client can manage on a reduced withdrawal, it may help avoid unnecessary erosion of the underlying asset. That way, they’ll not only avoid taking out the income they get to keep, but they’ll also avoid taking out the income tax on the portion of their normal withdrawal.
Q: Should clients with all-in-one accounts open locked-in sub-accounts to take advantage of lower interest rates?
They could open locked-in sub-accounts to take advantage of lower rates. However, having an all-in-one means your interest should already be affected by the drop in the prime rate. There may be slightly lower rates for fixed-terms; however, we don’t know how long this environment will last. If you decide on this strategy, it will be most effective if your client has the cash flow to pay down the principal quickly to maximize this period of lower rates.
You should take care when recommending a client lock up a revolving debt at this time, as they could lose flexibility they may need when they lock into a fixed rate. We don’t know how things will change in the next few months, nor how long the economic impact of this pandemic will last.
You also don’t want to encourage clients to get a slightly lower rate for a product that is now locked-in where they have to pay a principal, which won’t be re-advanceable. The amount of savings could be quite small, and the rigidity (like not being able to advance the principal they paid down) might be riskier than it’s worth.
Q: How do you recommend clients use lines of credit, so it doesn’t hurt their credit score?
Clients should avoid maxing out one line of credit before moving on to the next. To limit the impact on their credit score, they should not go over 80% of the limit on any type of revolving credit account. Also, remind your clients that they should be monitoring their credit score closely during this period of uncertainty as they may be more vulnerable to fraud. Nowadays, most banks and apps offer free credit scores, and all Canadians have access to one free credit report per year.
Q: What are some good prospecting ideas during this time (e.g. online marketing, etc.)?
Right now is a fantastic opportunity to be proactive! Most of the industry is on the same page right now about not panicking, not cashing out, etc. Also, there are a lot of fantastic resources (articles, blogs, social media posts) that you can share. In general, talk to people about how their income is going to be affected. You could even share some content about how to get a cash flow strategy so that if someone’s income is affected, they’ll know what to do.
Q: I’m thinking of hosting my own office hours and opening it up to clients, friends and family. What advice should I include?
When offering advice, the best place to start is to teach them about committed and spendable cash flow, which can help them manage their expenses. You can also invite them to Winton so you can collaborate on some financial solutions. You could even create a sample case in Winton before the session and walk them through what to adjust so they can see the impact any changes to their finances would look like. You can also show them what additional opportunities you can uncover through CacheFlo Advise.
In addition to a strategy walk-through, you can host office hours to focus on debt and income replacement strategies. Talk to attendees about appropriate uses of debt, especially for times like these. Make sure they know not to transfer random top-ups from their line of credit or emergency savings. Anything used to supplement lost income should mimic their income (think semi-monthly or bi-weekly transfers on their regular payday). We think if we just take money when we need it, we won’t take as much, but in reality, we’ll end up taking much more! You can also teach them the sequence in which to use different assets if they need to supplement their income.
Q: How can I help people prepare in case things get worse.
Ensure they have a separate spendable account, and that they know how to make adjustments in Winton. People are looking for things they can control. Instead of telling people what not to do (i.e. don’t panic!), give them something to work on and figure out. Having access to Winton will allow them to model different scenarios, so they know what will happen if their finances change.
Q: Who should I reach out to help?
Now is the time to be reaching out to your entire client base and letting them know how a cash flow plan can help them. Clients who passed on the process before may be the ones who need it the most now. Also, don’t ignore your older clients. This is a very high-risk time for them to be manipulated by creditors. It’s also highly likely that this type of client will use their credit card before they use a line of credit. Seniors may think of debt types differently and approach long-term vs. short-term debt risk with a different mindset than your younger clients.
For more ways to help your clients, check out our FREE Webinar: Managing cash flow disruptions.
Questions and responses have been edited for clarity.
Government of Canada. (2020). Benefits, credits and support payments; CRA and COVID-19. https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-benefits-credits-support-payments.html