Keep clients on track

Lisa MacColl / January 30, 2012

railroad-tracks

Don’t let life-changing events derail your clients’ plans

When clients experience serious health issues, relationship breakdowns or death of life partners, advisors play an important role in helping them through.

“An advisor has a responsibility to know as much about the client as possible: are there parents with health challenges or children with special needs?” asks John Cairns, CFA, and regional vice president of Western Canada for Scotia Private Client Group. “A good advisor will prepare the clients for the unexpected, and help them avoid knee-jerk reactions.”

Here’s what you need to know to protect their portfolios.

General portfolio management for clients in transition

Cairns has some rules of thumb for portfolio preservation in times of transition:

  • Keep the equivalent of approximately six months’ worth of monthly expenses in a cashable GIC, money market account, or similar liquid investment.

    • “Six months will give the client enough time to figure out what expenses will be needed,” he says. “Another six months of expenses can be transferred to the liquid investment at a later date. Leave the rest of the portfolio in the existing direction.”

  • Choosing conservative investment products with staggered maturity dates can help preserve capital for investors with a low risk profile.
  • If preservation of capital is a concern, rebalance the client’s portfolio to 25%-to-30% equities and invest the balance in more conservative instruments. That provides a measure of asset growth while preserving the capital.

    A rebalancing move like that is important in a relationship breakdown, for example, where the value of the portfolio will be divided on the date of separation, but may not be finalized for a few months.

  • Shifting a portfolio to strictly Canadian equities will remove the risk of foreign currency and global market volatility while providing adequate asset growth.

Other things to consider:

Does the client have critical illness insurance? Not all medical conditions are covered by critical premiillness provisions, and there is often a waiting period for coverage. In addition, the policy may not cover a recurrence of an illness, such as when cancer spreads to a different site.

Does the client have a group benefits policy that provides short and long-term disability insurance (STD/LTD)? Some policies exclude coverage for pre-existing medical conditions, unless the medical condition had been stable for a period of time.

If the client has STD/LTD, he may need to complete several medical forms, but may then qualify for continuing income of approximately 60% of the client’s salary. There may be a waiting period of two weeks, and all the information should be outlined in the benefits handbook, or available from the human resources department at the client’s place of employment.

Does the client have supplemental medical insurance? What is covered under the policy? A client may need additional cash flow to cover medical costs. For example, Schultz points out even if prescriptions are covered by a supplemental plan, there is often a cap on the amount a plan will cover in a plan year, and the client’s medical expenses could quickly max out the plan benefits, leaving additional expenses that need to be covered out of pocket.

Help clients with health issues

If a client has been diagnosed with a serious or life-threatening health issue, Mark Schultz, an advisor with Sun Life, says you should ensure there’s sufficient cash flow to let the client focus on health rather than the bills.

“If they had invested heavily in equities, moving some of the money to a low-risk, [liquid] investment, such as money market or a daily interest account will provide access to additional funds,” he says.

Psychology comes into play as well. A client facing a serious ailment is inclined to attack a bucket list of things to do before death. “If the client takes the $50,000 for a trip around the world, what will happen to the spouse after the client dies?” says Cairns. “And what if the client recovers and the money is gone?”

Help clients through separation, divorce or other relationship breakdown

Divorce can mean separation of client and advisor, not just of spouses, says Linda Cartier, president of the Academy of Financial Divorce Specialists.

“It is an inherent conflict of interest to continue to advise both parties when they are going through a relationship breakdown,” she says.

If you worked with both partners equally, they may need to choose which one you’ll continue to represent, or you need to refer each client to different financial advisors until the divorce is settled. This should take place as soon as the advisor finds out about the separation.

Relationship breakdowns can also cause privacy issues.

“If the account is held jointly, information can be shared with both parties,” says Cartier. “In other instances, an advisor will need to determine what information can be provided and to whom.”

An estranged spouse is legally entitled to know the value of the investments, but only until the date of separation. If one spouse has left the matrimonial home, the advisor needs to ensure statements are not sent to the former address in error.

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