Advising in a fragile world

It’s easy to be a good advisor when the markets are steady. But how do you provide the guidance clients need when the world is in constant flux?

“What’s happening today is going to affect us down the road, and it’s going to affect our children. So we need to take an intergenerational approach,” says Evelyn Jacks, president and founder of The Knowledge Bureau, which is holding its Distinguished Advisor Conference in Palm Springs, California.

In other words, it’s not just your clients you want to be concerned about—it’s their children and grandchildren, too.

“It takes the edge off the current crisis, because then we’re dealing with longer time horizons,” she says. “There will be many more economic cycles, and it allows us to calm down and think about what we can do in a fragile recovery.”

In tumultuous times, it’s easy to make mistakes if you’re panicking about market events.

“The majority of people leave all kinds of opportunities on the table to manage their tax efficiencies and debt properly,” she says. Combining big-picture thinking with an intergenerational approach can allow you to capitalize on those opportunities.

For example, “Right now is a very good time to transfer assets if we believe valuations are down and capital gains can be avoided,” says Jacks.

Take the family cottage, often a disputed asset. If the family can decide in advance who it will go to, today’s despondent economy makes it a great time to give away the title.

To see the big picture, Jacks and The Knowledge Bureau advocate “real wealth management,” which involves using many different advisors—tax, benefits and pensions, estate planner, insurance, and others.

“An inter-advisory approach is such a game changer, because when you can work as a coordinated team—within the family hub and the inter-advisory hub—then all stakeholders work together under the same plan. You’re going to have accountability. You’re going to have the best brains with specialization in various areas working towards the goal. And family members will fall in line because they can see they’re a member of the team.”

Another part of long-term thinking involves anticipating future problems.

“Now is a good time to think about how we will shore up our purchasing power in the future,” says Jacks. “If stimulus and monetary policy is keeping interest rates low today, what will happen when governments ease up? Interest rates will go higher; inflation might kick in.”

To hedge against inflation, she suggests a two-pronged approach: ensuring tax efficiency and managing debt.

“When advisors do a cash-flow analysis with clients, they can create new money for investment purposes,” says Jacks. “They can, for example, avoid Old Age Security clawback zones with proper cash flow management. Or increase child tax benefits, and other credits on the tax return, simply by utilizing the RRSP opportunities.”

Another example: some clients’ incomes have fallen in 2011 due to unemployment or poor market conditions for business owners. If they remit their taxes quarterly, they may not have to pay the December 15 installment.

“Do they know that? Should they be pulling money out of the marketplace in a fragile time to pay a tax installment they don’t have to make?”

And then there’s the basic tenet of being an advisor: educating clients. Convincing them to hang on can also go a long way to hedging inflation.

“If you believe your money is going to be worth more today than in the future, then maximize the time value of money. If we can stay invested through a variety of life cycles, we’re going to do better.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.