Wealth advisors often focus on investment advice, but credit is equally important. These four considerations will help you guide your clients toward achieving their life goals.

1. Treat credit as part of your client’s overall wealth management strategy

Credit can redistribute a client’s future spending power to today, helping pay for a better current standard of living. However, it carries risks. To determine how much credit can help and what strategy to use, you need to evaluate your client’s life stage, financial needs and resources, earning prospects, lifestyle expectations and risk tolerance.

Young families are often most in need of credit and the advice that comes with it. They are taking on new obligations (house and child) while, in some cases, still paying off earlier student loans or credit cards. In addition, their family income may decline early on as one parent takes time off to care for a newborn. While their expenses go up and family income may temporarily decline, they often have good future earning prospects. Credit, in the form of consumer loans, mortgages, lines of credit or bank overdrafts, can help the family maintain their desired lifestyle by covering income shortfalls. It also allows for building savings through, for example, RRSP contributions. Consider the amount of debt your client can take on, while always balancing it with their expected future wealth gains and risks.

Read: Seek safety in senior debt

2. Run through credit strategies with business-owner clients

Wealthy clients may want to use credit to help grow their businesses or venture into new projects. In these situations, consider a suite of sophisticated lending scenarios, such as financing through personal holding companies; bankers’ acceptances, which are short-term bank-guaranteed debt instruments issued by a company for payment at maturity; commercial loans; real estate loans and, in some cases for large entities, the use of interest rate swaps. Bring in a lending specialist, as needed, to help work through these options for your client.

Read: 35% of biz owners don’t have emergency plans

3. Think critically about borrow-to-invest strategies

Leveraged investing can help grow your client’s wealth. But clients should never borrow more than they can afford to lose. Generally, leveraged strategies are only viable if the resulting after-tax return on investment is higher than the after-tax cost of borrowing. Always explain the risks, costs and consequences of leveraged investing, looking at both best-case and worst-case scenarios. What happens if the value of the investment carried out with leveraged funds declines? Does the client realize she can lose more than the money originally invested? In the case of buying through a margin account with a brokerage, will your client be able to deposit additional cash or securities in the account on short notice to cover market losses? Also, if your client has borrowed from a brokerage does she understand that the firm has the right to sell some or all of her securities, without consulting her, to pay off the loan if she doesn’t meet their terms? Your client needs to think through these potential outcomes even if they’re unpleasant.

Read: Why to choose floating-rate loans

4. Stay up to date on best practices

New guidance from IIROC, called Borrowing for Investment Purposes – Suitability and Supervision, provides rules on the supervision and suitability obligations involved in recommending borrow-to-invest strategies. Clients who’d like to learn more about credit strategies can also find useful information at the Financial Consumer Agency of Canada (FCAC) and Credit Canada Debt Solutions.

Read: When carrying debt makes sense

Simon Parmar is Managing Director of the Canadian Securities Institute (CSI), part of the Training and Certification arm of Moody’s Analytics.
Originally published on
See all commentsRecent Comments


Great piece Simon.

Saturday, May 24 @ 10:37 am //////


Borrow to invest can destroy your life if you invest at a wrong time!
Here you can read how credit history works

Friday, May 23 @ 11:34 am //////

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