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Strategies for Clients Struggling with Inflation

December 6, 2022 6 min 37 sec
Carissa Lucreziano, CFP
CIBC Financial Planning and Advice
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Carissa Lucreziano, vice president of financial and investment advice with CIBC.

We’ve seen mortgage and line of credit rate increases at levels we haven’t seen since 2008. Grocery bills increasing in the realm of 11% and higher. All this leaving many Canadians concerned about the current strain expenses are having on their cash flow and the ability to save and invest for the future.

Here are five things that you can think about and discuss with your clients today. Share financial tools like online calculators to help clients better visualize and understand their current situation and their plan. Encourage them to try them out for themselves. For example, a budget calculator or a cash flow tool. Invite them to events that are relevant to their needs and life events. That could be a virtual event, something possibly in person, something that will help them, assist them, in the planning as well as their future goals.

Engage the family dynamic into the conversation. Consider identifying where partners, spouses or even parents can be weaved into that planning conversation. There could be opportunities for intergenerational planning discussions and overall estate planning discussions. And now is also a great time to introduce them to experts that will help them on their journey, such as lawyers, accountants, and estate specialists to name a few. A good place to start to help your clients understand and manage their finances is through a budget. Our most recent financial wellbeing poll found that more than 50% of respondents wish that they had a stronger level of financial literacy. Canadians are looking for more tools and resources to get a handle on their finances with a key area being day-to-day banking and budgeting. In this environment, it’s challenging to just simply cut back on expenses with prices for essentials like groceries, gas and mortgage payments, putting a big dent on cash flow.

Encourage clients to understand where their expenses have increased the most, including reviewing their debt payments, overall credit owing in the facilities available, and identifying areas they can optimize savings. Once they have an up-to-date budget and you’re aware of how much discretionary income they have each month, there’s an opportunity to look at their regular savings plan or implement one, allocating some money to be set aside for an emergency fund or looking at setting up those investment plans for RSPs and TFSAs, for example. However, on the flip side, if cash flow becomes tight, can encourage clients to simply decrease the contributions, but if they don’t have to, don’t stop them completely. And when the opportunity does arise in the future, look at putting those back up to the levels that they were at previously.

Next, review borrowing and credit expenses. You can uncover if your clients have any credit products that are affected by interest rate increases in the result of inflation. Their credit card interest rate probably won’t be impacted, but if they have a loan, line of credit or mortgage with variable rate interest, their payments have increased. You can walk through variable versus fixed decisions for mortgage clients. This is a big decision on many clients and many Canadian’s minds right now if they’re in that situation. If they were already in a variable rate mortgage, their payments may have gone up by approximately 3.25 since last March. Clients that are coming up for mortgage renewals over the next 12 months, they’re not going to wait until their maturity date. They’re thinking about it now. They’re looking for advice now. Keep those conversations going by taking them through different mortgage or credit scenarios and help them understand what their options are so they can feel more informed to make a decision that best suits them.

You can also want to look at their investment strategy. An important consideration is to bring to the forefront what the real return is on investments after inflation. Something that many clients, Canadians in general, haven’t really had to worry about over the last several years. In other words, how is the purchasing power of their investments holding up? Especially over the last little while. From 2010 to 2019, inflation averaged 1.6% annually below the midpoint of the Bank of Canada’s target rate of 1.1 to 3%. Inflation was both low and stable for an entire decade, which was good for equities. And as mentioned before, clients didn’t have to worry about these levels in the past 10 years. One of the most important pieces to consider is staying focused on the plan, reviewing their plan to ensure their asset allocation matches with risk tolerance and their current comfort level. Given lower expected returns and higher expected inflation, it’s important to have enough in equities to protect investments against loss of purchasing power.

This could be hard to do if it conflicts with risk tolerance. To help risk-averse investors, emphasize high-quality dividend growth equities. Canadian equities offer an attractive dividend yield compared to other developed markets and have also held up well against inflation so far, helped by our strong energy sector.

There may still be a lot of bumps in the market and you may still get calls from clients that will want to sell. Here are three strategies to help reassure them and get them to continue to invest. Focus on the long-term and understand the impact of their decision today. Get back to goals. While market losses can feel unpleasant, unlikely that most losses will fundamentally change a long-term goal. For example, someone is still planning to retire in their mid-sixties and they have 20 years to go. Still planning for children to attend university in the decade.

If goals haven’t changed and portfolios still make sense, often better to leave the portfolio as it is, possibly small tweaks, and give time for the market to recover and benefit from longer term compounding of wealth.

Review the big picture chart with clients showing that risk decreases and return increases when extending blend-investment horizon. And last, explain how clients earn the equity risk premium over the long term. Stocks return more than bonds and cash. The ability to identify long-term goals and purposefully invest towards them is a big part of how clients earn the higher expected return from equities.

The market provides the return, the clients earn it through patience and purpose. Clients may have funds waiting to invest in. There is no great time to invest into the market. You can show them the value of dollar cost averaging, and this could be a very, very good strategy, especially in times of market turmoil. Clients can sometimes make this into an all or nothing decision where they’ll either go all-in or wait on the sidelines. In practice, there’s a lot of room in the middle. For example, suggest deploying half of that cash now and deploying the other half over six to 12 months on a regular schedule. This balances the risk of investing with the risk of not investing.