Debt needs to be dealt with

December 24, 2009 | Last updated on December 24, 2009
4 min read

According to the Bank of Canada, Canadians currently have a $1.42 of debt for every dollar of income they earn. Now, you may worry momentarily that this might apply to your clients, but then you tell yourself, “Everything is fine; I don’t deal with the sort of people that report is about.” The fact is, you likely have clients with growing debt problems.

Wealth resides in about the top 3% of our population in Canada. Advisors can’t possibly only service that top 3% or there would be a lot fewer of us.

Earlier this year a physician client of mine told me he was once presented with a study showing that 95% of doctors are influenced in some way by pharmaceutical companies. Apparently, every doctor that was asked if they were influenced by the pharmaceutical companies said, of course they weren’t. Then with the report showing that indeed 95% of doctors were, every doctor then declared that they must be part of that rare 5%.

Are you telling yourself, like those doctors, that your practice is part of that figurative 5%? Are you convinced that the Bank of Canada is talking about all the other people’s clients? If you don’t routinely visit your clients’ financial behavior toward debt, you’ll never know to what extent your book of business is exposed to the brewing storm of Canadian debt.

I believe in advisors. I think with the right tools we can change this Canadian debt disaster. We need to make it okay for clients to admit to us that they could use some guidance when it comes to debt and spending. We are probably the most dominant influence to the financial behavior of Canadians, but we aren’t always harnessing that power when it comes to the other side of the balance sheet.

So if I’m going to point out a flaw in the system — a flaw so massive in magnitude that Mark Carney says it poses one of the biggest risks to our financial system — I’ve got to offer some solutions.

I think more advisors need a plan to talk to clients about debt. For my part, I’ve got a few suggestions of my own.

Send a letter After running it by compliance, you might want to send a friendly email or letter to clients. .If you have a lot of clients, you might want to segment by age, as your younger clients are more likely to have the biggest issues with debt. I suggest you simply open up the conversation by slipping in a copy of one of many articles written about the Bank of Canada’s recent warnings on Canadian debt-levels.

Simply tell your clients that debt may or may not be an issue for them, but that any improvement in efficiency of paying off debt drastically affects their financial plan. You can invite them to make an appointment to see if you might be able to help. If you don’t think you are ready to help in this area yet, consider pulling in some resources — a mortgage broker or another debt management professional you know may give you valuable additional insight in managing debt.

Managing mortgage debt When helping a client conceptualize a mortgage, you need to make them understand that today’s low interest rates should be viewed as an opportunity to get more principal paid off &3151; it should not be viewed as way to carry a lower payment.

Unfortunately, clients tend to sign a 5-year mortgage, think of that 4% they are paying today and in their minds eye push it out to the lifetime of the mortgage. They often overlook the fact that at the end of that term they are fully exposed to whatever the interest conditions of that time are.

Clients should be reminded that when their mortgage renews five years down the road, the rates could be anywhere and that what will really matter is the balance they owe at that point in time. If you need help illustrating this, there is a lot of software online that can give a reasonably accurate estimate of their balance at the end of their first term.

Personally, I like all-in-one line of credit type mortgages. They work well, but you must give the client a financial plan to get the most out of them. If you have a client that really wants a fixed rate, advise them to calculate what the payment on their mortgage would be, say, at 6% or 6.5%, then recommend to the client they get the best rate of the day, but commit to making payments as if the mortgage were at that higher rate.

This does two things. One, it gets the mortgage balance down much faster, so whatever the interest rates are at renewal they won’t be devastating. Two, it allows the client to get used to carrying their mortgage payments at higher rates.

Debt discussions are not to be feared Let your clients know that you are not there to judge; you are there to help. Debt can and often does affect a client’s financial plan as significantly as asset growth.

Not every advisor will want to discuss debt, but those who do might just become more than an advisor to their clients. They might become the advisor to their clients. So I challenge you, before this day is out, talk to your clients about their debt.

Stephanie Holmes-Winton is a Halifax based advisor who focuses on both sides of the balance sheet. Stephanie can be reached at or