Investors who are single face additional financial challenges in comparison to couples or families. In order to help this growing demographic, financial advisors need to have a clear understanding of the risks they face and the creative solutions to overcome them.
According to Statistics Canada, one-person households have recently surpassed couples with children as the most common type of household in the country – more than doubling during the past 35 years. In particular, solo-living among those aged 35 to 64 is rising rapidly.
Anthony Reino, financial planning advisor at Assante Financial Management Ltd. in Oshawa, Ont., says that because singles are the only people making financial decisions in a household, they’re often missing a sounding board or someone to play the role of “devil’s advocate.” That’s where advisors come into play.
Indeed, for many single clients, advisors are an accountability partner, says Shay Steacy, head financial planner and principal at Toronto-based Kind Wealth. She has worked with several one-person households in recent years – from professionals who have chosen to focus on their careers to those who have gone through a divorce.
“A lot of people just want to [ask someone if] there’s something they’re missing, or is it really just going to be a little bit harder [to achieve their goals because they’re on their own]. And sometimes, it is just a little bit harder,” Ms. Steacy says.
The biggest challenges for singles often relate to cash flow and income risk, these advisors say. In most cases, their fixed costs are similar to those of a couple – for example, they pay the same property taxes or mortgage payments – but rely on only one income to cover these expenses. That may also leave some single people with less money to save and invest.
Mr. Reino says these risks can make single clients uneasy because they often realize that they have no one to depend on but themselves.
“We also find that they tend to be – generally at the beginning – ultra-conservative because they’re afraid of losing what they have,” he says.
Similarly, Ms. Steacy says that she often sees single clients with more savings in cash.
“They’re almost a little bit more intimidated to make a decision. So, they just say, ‘As long as I have some cash, then that will [be the solution] for things that go wrong.’ And that might not be the most efficient thing to do.”
As a result, Mr. Reino says part of an advisor’s role is to educate these clients so they feel more comfortable taking on some risk within a portfolio and consider more growth-oriented investment strategies.
Says Ms. Steacy: “The difference in a rate of return from keeping something in cash versus [an investment with] even a 5 per cent longer-term rate of return can be huge when you’re talking retirement savings.”
Another strategy that could help persuade clients who are single to take on more risk that’s associated with long-term investments is to reduce the overall volatility in a portfolio, says Vanessa Flockton, financial advisor at Nicola Wealth Management Ltd. in Vancouver.
She says her firm focuses on investing in a diversified portfolio of cash-flow-producing assets in which all clients, on average, have just more than 30 per cent exposure to publicly-traded equities compared with 60 per cent in a typical balanced fund. The remaining 30 per cent is replaced by assets such as commercial real estate, commercial mortgages, private equity and private debt.
“A big portion of the return is coming from the income these assets generate. What that does is it basically reduces the volatility of the portfolio over time. So, that helps a lot because if you’re a single person, you’re saving hard and you’re doing all the right things, you need the portfolio to actually do what it’s supposed to do and lower that risk,” Ms. Flockton says.
Another important – but sometimes overlooked – component of a single client’s portfolio that’s critical to reducing risk is insurance, says Darrell Currah, a colleague of Mr. Reino who’s also an Assante advisor in Oshawa.
The discussion around critical illness and disability insurance coverage is of particular importance – more so than life insurance – because it provides single people with an income if they fall ill or develop a disability, he says.
“In a single-income household, something like disability insurance becomes even more critical because of the complete catastrophic events that could unfold,” Ms. Steacy says.