Advisors only recommend borrowing money if the client has a plan to pay it back, which may be difficult for some.FG Trade/iStockPhoto / Getty Images
Investors facing a cash crunch due to the economic fallout from COVID-19 are turning to their financial advisors for ways to shore up short-term funds.
These clients include workers and business owners who have lost income due to the coronavirus shutdowns as well as retirees either who are either relying on the markets to fund their lifestyle or need cash to support their struggling adult children.
Advisors say being “asset rich and cash poor” is a reality in today’s economy – and many are working with clients on strategies such as tapping into savings to taking out loans. Withdrawing money from investment portfolios at this time, given the market volatility, is often considered the last resort.
“What we don’t want to have to do is sell stocks in a down market,” says Jeet Dhillon, vice-president and senior portfolio manager at TD Wealth Private Investment Counsel in Toronto.
She recommends advisors begin by assessing a client’s overall asset mix, including how much cash they’ve set aside in an emergency fund, or maybe in a savings account for an upcoming vacation.
“Maybe they can tap into those funds first,” she says, particularly as many vacation plans will likely be cancelled as a result of the global quarantines.
Ms. Dhillon says some households may have even saved extra money in recent months with many activities cancelled and venues closed during the lockdown.
If the savings aren’t enough to fulfill short-term cash needs, especially if it’s a larger, unexpected expense like a new roof or to support an adult child who is out of work, advisors say clients could consider borrowing money.
Taking out a loan or drawing from a home-equity line of credit is a good option in the current low-interest-rate environment – and often better than selling equities in a volatile market.
Borrowing money to get some cash quickly “buys you time to let the portfolio recover,” says Sylvain Brisebois, managing director, senior vice-president, senior wealth advisor and portfolio manager at BMO Nesbitt Burns Inc. in Ottawa.
“The risk is that you’re using someone else’s money to finance some of your activities,” he says. “Also, you’re getting yourself into monthly payments.”
Mr. Brisebois and other advisors only recommend borrowing money if the client has a plan to pay it back, which may be difficult for some retirees.
“I don’t love retirees dipping into debt vehicles,” says Simon Tanner, principal financial advisor with the Dynamic Planning Partners team at Investia Financial Services Inc. in Vancouver. “But if they understand the duration risk and the interest-rate risk, it can be a good way to access shorter-term cash while waiting for another asset to perhaps recover or appreciate. As long as there’s a discussion and the client understands how debt against a hard asset is being used to their financial advantage.”
Mr. Tanner says some investors might look at divesting other assets, such as a boat, recreational vehicle or a second property, if they’re no longer need it and are comfortable with the realized return.
Investors who do liquidate assets, whether it’s property or equities, need to consider the tax implications, Ms. Dhillon says.
For example, she says a client may choose to sell stocks in the current market to take advantage of tax-loss selling, especially as markets have performed well in recent years.
“If there are losses in the portfolio now, why not do some tax-loss selling?” Ms. Dhillon says, noting that the losses can be carried back three years and carried forward indefinitely.
“If you paid capital gains taxes in the past three years and you have losses now that you can go back and apply, it will allow you to recuperate some of those taxes paid and maybe get a refund, which can also be a source of funds,” she says.
Ms. Dhillon says advisors can also look at whether clients have life insurance policies with a cash value as a potential source of funds.
Investors can borrow from the policy, use it as collateral for a third-party loan or withdraw cash from it. However, she notes it could affect coverage, deplete the value of the policy and there could be tax implications.
Ms. Dhillon doesn’t recommend this strategy for clients with newer policies, “but if you’ve had the policy for 10 to 15 years, there’s a good chance you have some cash built up in there,” she says.
Investors should talk to their advisors about their options to source short-term cash before acting, and ensure they understand the consequences, she says.
“We encourage people to not act on impulse,” Ms. Dhillon says. “We want them to have these discussions, weigh the pros and cons, and the advisor can help them sift through the options and help them choose which one is the better one.”