The quandary

Your senior client, 75, is a retired executive and sophisticated investor—and he struggles with cash flow. Part of the problem is low rates; part is that spending on travel is greater than anticipated (his children and grandchildren live far away). He tells you he’d like to dedicate part of his portfolio to higher-risk equities, and that he understands the risk for capital erosion. How do you proceed?

The experts

Rory O’Connor
Rory O’Connor,
Senior vice-president and portfolio manager, O’Connor Engelbert Investment Group, Richardson GMP, Vancouver

Our clients have individual wealth plans that we revisit about every three years and also before retirement. Plans are stress-tested using three scenarios: a conservative performance rate of 4%, a 25% market drop at the beginning of retirement from which the client doesn’t recover, and increased expenses of 20% to 25%. The plans thus have flexibility built in.

For the client described above, if cash flow can’t be sufficiently increased within the plan, an adjustment in asset mixture might be required. For example, the client could readjust fixed assets, such as real estate, into liquid assets. Real estate assets can be substantial, especially in a city like Vancouver; however, selling a home and downsizing might require difficult discussions.

If the client is a widower and lonely, discussions might include the option of an independent living facility for greater social interaction—something that the home sale might allow the client to afford. Sometimes, clients don’t appreciate the financial freedom that comes from selling a home, so they might need to be walked through the numbers, as well as the benefits, of being house-free.

If adjustment in asset mixture isn’t possible, revisiting the client’s investment policy statement might be necessary so it allows flexibility to meet income requirements. However, any changes to the statement must be made putting the client’s interest first, with proper documentation and disclosure.

Margaret Samuel President
Margaret Samuel
PresidentCEO and portfolio manager, Enriched Investing Incorporated, Toronto

Advisors must know their clients, which includes knowing them as they age and face challenges such as dementia. This former executive may no longer be a sophisticated investor, so an advisor shouldn’t assume the client understands the consequences of investing in higher-risk equities.

First, I’d determine with the client whether he can reduce cash flow, perhaps by having grandchildren visit him or by flying economy class if he’s currently travelling business class. Advisors should address such behavioural issues with clients, but they must also be sensitive because clients care about more than just the numbers.

If required, the client could consider decreasing bond duration or investing in quality corporate bonds over government bonds within fixed income to help overcome the low-rate environment.

Another option in a low-rate environment is allocating a portion of what would otherwise be fixed income to quality dividend-paying stocks.

If quality equities are also used for growth, the advisor must ensure the client understands that his portfolio will experience greater volatility, and the client may require extra hand-holding as stock prices fluctuate.

The implications of capital erosion must be considered in the context of the client’s goals and time horizon. For example, he might want to preserve capital to provide for children, grandchildren or charities. Calculations must be performed to show potential lost capital and how long remaining capital will last based on life expectancy.

All calculations and decisions will be based on the investment policy statement and KYC, including client objectives and constraints such as time horizon.

Regulatory guidance on serving seniors

IIROC’s 2016 guidance on serving seniors notes that clients’ stated investment objectives can be inconsistent concerning income generation and capital preservation. To determine if both are achievable, particularly in a low interest-rate environment, advisors should assess KYC and client investment information (including time horizon) and communicate them to the client. Where both goals aren’t achievable, advisors should get clear instructions about which takes precedence.

The guidance says that a lower-risk, capital-preservation-focused portfolio won’t always be most suitable if the client can’t generate enough investment income to cover living costs. Likewise, a higher-risk, income-focused portfolio won’t be most suitable for a senior client uncomfortable assuming greater risk.

The OSC’s 2018 annual report said more than half of firms in a compliance review had poor KYC documentation for seniors.

Last year, the MFDA focused on suitability for seniors. Its strategic plan to 2022 includes research on senior client outcomes.

To contribute your own ethical dilemmas or conduct quandaries, please email Michelle Schriver.