Preserve money don’t multiply it

Even though it looks like the market has recovered from the 2008 losses, the experience is not exactly a distant memory for most clients. Some haven’t blinked an eye but others have realized that preserving assets is more important to them than they originally thought.

This year’s fund data tells the story. Millions sit in products such as money market funds or GICs waiting out the storm. (A good portion of that money sitting on the sidelines is likely off-book assets.)

But when it comes to the assets that advisors actually manage, very few clients have asked a complete transfer of equities to deposit products such as GICs or money market funds, say the advisors we interviewed. Instead, most clients are playing the waiting game, looking for the recovery.

In the case of some clients who need RRIF or other payments, for example, advisor Denzil Feinberg has been selective about what investments he takes money from. “I take from the profitable investments, ones that we have made some money on,” explains Feinberg, a registered financial planner at Feinberg Financial in Winnipeg. “If it’s something they need and it’s a capital loss that clients can use, I would deliberately sell from a capital loss to give them the money they need. Some clients have enough pension income [to ride this out] which is good.”

On the other hand, Brad Brain’s clients are still very much in the accumulation phase. Brain, who resides in Fort St. John, B.C., one of the youngest towns in Canada, notes that his clients tend to be in their thirties, earning impressive salaries, and working in the oil patch.

“More often than not, a GIC has been an emotional reaction to the headlines of the day,” says Brain, the financial planner at Brad Brain Financial Planning Inc. “Volatility, as long as we’re avoiding potential blowups, is something we want to embrace as an opportunity, not run hiding from it because things get a little choppy. Part of buying low is you actually have to put some money to work when things are looking ugly. It’s just insane for a 35-year-old with a long timeframe to lock in money at historically low interest rates and that’s before we even put inflation into the picture.”

That isn’t to say there’s no renewed interest in deposit products. Peter Ficek notices more awareness from business owners in particular. Ideally, 10% of a business’s assets are placed in cash, which betters its ratios for obtaining bank financing. (When it comes to financing small businesses, banks consider the current debt to equity ratio, the current capital ratio and the current debt service coverage.)

But over the last decade, business owners have tended to use any extra money toward further business investment.

“In good times, we seem to forget the basics and in terms of worse, we seem to go back to the basics,” says Ficek, a CFP and business finance consultant for Calgary-based Business Financing Corporation.

Now saving 10% makes business owners “look better in the eyes of their bank, therefore they’re able to be those few businesses that are going to obtain financing” in a tougher economic climate.

What about new assets?

Waiting for a recovery with current assets is one thing, but what about new money for investing? Julie Leefe is finding more of her clients aged 50 or more are requesting that these funds go toward GICs.

“People aren’t demanding to sell something that went down the last three months of 2008, but if we have some money that’s been freed up, it may go to GICs,” says Leefe, a financial planner and investment advisor with National Bank Financial in Winnipeg. “In general, we’re having a discussion about how much more safety they might like going forward. But we’re not seeing a change from medium-risk investments to low risk until we see a little more recovery.”

She’s very reluctant to use five-year GICs since the rates are so low. But typically her clients have laddering in their fixed income portfolios, which means different products mature each year, giving her more flexibility as to where to place products.

Some advisors see last year’s events as an opportunity to bring up the guaranteed minimum withdrawal benefit products with clients. When these products first debuted in 2007, Brain originally scoffed at the cost for GWMBs. He’s now changed his mind, especially since some products guarantee income for life. “The right situation is for somebody who is so completely risk averse that they need to have that guarantee,” he says. “What this latest environment has revealed is that there are a lot more people in that category than we thought.”

Feinberg is reluctant to have his clients pay high fees for guarantees but recognizes there could be a need to protect RRIF, savings or future incomes. He’s currently evaluating four different GMWB products. As he points out: “Advisors make their money in good years and earn their money in bad years and right now, for the last nine months, we should have been earning our money by working very hard. We should be looking at clients individually and thinking of the tax effects and the sensible financial needs they have at the time.