Now is also the time to review short-term financial goals with clients, says an advisor.Pekic/iStockPhoto / Getty Images
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With news of a likely recession on the horizon, many advisors may want to take a proactive approach with clients, especially younger ones.
More than 80 per cent of Canadians say they’re concerned a recession might occur by the end of this year, according to the Bank of Montreal’s Real Financial Progress Index released in September.
While most clients have likely lived through a recession before, the ups and downs of the economy may not be old hat for Generation Z and younger millennials.
Sahar Abdul Zahir, financial advisor at BlueShore Financial Credit Union in Vancouver, says many of her younger clients are concerned about a recession because they haven’t experienced one before, at least not in their working years.
“They’re hearing about it in the media and on social media apps, so there’s a lot of anxiety,” she says.
For many, the biggest fear is the unknown. They don’t know what to expect and what it will mean for them. There’s a sense of feeling unprepared, she says.
Advisors can take this opportunity to help prepare their younger clients on what to expect and how they might best manage their finances.
Andrea Thompson, certified financial planner and founder of Modern Cents in Mississauga, Ont., says many of those in their 20s haven’t prepared for an unexpected interruption to their cash flow, which could happen with a job loss during a recession.
Ms. Thompson has been encouraging her younger clients to go through a cash flow analysis to gain an awareness of what money is coming and going out, and where expenditures might be increasing. For example, those with variable debt, such as mortgage debt, may not have realized they’re paying less of the principle now in their debt repayment plan.
Helping clients with this might also help them realize they need to trim down some discretionary expenses and employ some discipline when it comes to other areas.
To take this a step further, Ms. Thompson might point to a budgeting app like Mint or You Need a Budget for clients to use on their own. Getting a hold of their finances can help establish a sense of security or confidence during rocky times.
Now is also the time to review short-term financial goals with clients, Ms. Thompson says.
“Right now, especially due to the elevated cost of everything, it’s important to review those goals to see what is actually wanted or needed,” she says.
“A lot of times we tell ourselves we need something and we don’t actually need it. We just want to have it. That’s a really important differentiation.”
Ms. Thompson advises clients put any “nice to haves” on hold or review them within the feasibility of their own budget and planning.
For instance, the costs of renovations are high right now, so that’s perhaps something to wait on. The same goes for buying a used car.
Start emergency fund, pay down debt
Ms. Abdul Zahir says she’s been advising her young clients to start with the basics, which is padding their emergency fund or starting one if they haven’t already. While the typical rule of thumb is three to six months, for young people it can be hard to save up that amount of cash, so it might be easier to aim for three.
“At least if you have three months saved of your own money in cash then you can always have a small emergency line of credit as an emergency fund for your emergency fund,” she says.
From there, Ms. Abdul Zahir advises clients to pay down high interest debt as soon as possible and to avoid taking on any new debt in this environment if they can.
“If they absolutely must, the advice there is don’t buy too much house and don’t buy too much car,” she says. “Even if they do qualify on paper, they shouldn’t go to their absolute maximum.”
‘Teaching opportunity’ for advisor
Brandon Wiebe, fee-only financial planner at Money Helps Financial in Saskatoon, says for advisors who work with clients on a yearly retainer, it’s important to send out an email during times of market volatility to acknowledge what clients may be reading in the news.
“It’s to get a feel of how they’re feeling and doing,” he says. He might welcome them to get in touch to take a look at how they’re cash flow is right now or to talk about any personal circumstances that might have changed.
This opens up the door for them to talk about any recessions concerns, he says.
Ms. Abdul Zahir says this is also an opportunity to take a step back and educate young clients on what they’re hearing. Clients may not readily understand what a “bear market” means for example, or how economic cycles work.
“A lot of these fears come from not actually knowing these terms,” she adds.
“That’s a learning opportunity for the client and a teaching opportunity for the advisor.”
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