Don’t let life events derail clients’ plans

When clients experience serious health issues, relationship breakdowns or death of life partners, advisors play an important role in helping them through.

“An advisor has a responsibility to know as much about the client as possible: are there parents with health challenges or children with special needs?” asks John Cairns, CFA, and regional vice president of Western Canada for Scotia Private Client Group. “A good advisor will prepare the clients for the unexpected, and help them avoid knee-jerk reactions.”

Here’s what you need to know to protect their portfolios.

General portfolio management for clients in transition

Cairns has some rules of thumb for portfolio preservation in times of transition:

• Keep the equivalent of approximately six months’ worth of monthly expenses in a cashable GIC, money market account, or similar liquid investment.

“Six months will give the client enough time to figure out what expenses will be needed,” he says. “Another six months of expenses can be transferred to the liquid investment at a later date. Leave the rest of the portfolio in the existing direction.”

• Choosing conservative investment products with staggered maturity dates can help preserve capital for investors with a low risk profile.
• If preservation of capital is a concern, rebalance the client’s portfolio to 25%-to-30% equities and invest the balance in more conservative instruments. That provides a measure of asset growth while preserving the capital.A rebalancing move like that is important in a relationship breakdown, for example, where the value of the portfolio will be divided on the date of separation, but may not be finalized for a few months.
• Shifting a portfolio to strictly Canadian equities will remove the risk of foreign currency and global market volatility while providing adequate asset growth.

Other things to consider:

Does the client have critical illness insurance? Not all medical conditions are covered by critical premiillness provisions, and there is often a waiting period for coverage. In addition, the policy may not cover a recurrence of an illness, such as when cancer spreads to a different site.

Does the client have a group benefits policy that provides short and long-term disability insurance (STD/LTD)? Some policies exclude coverage for pre-existing medical conditions, unless the medical condition had been stable for a period of time.

If the client has STD/LTD, he may need to complete several medical forms, but may then qualify for continuing income of approximately 60% of the client’s salary. There may be a waiting period of two weeks, and all the information should be outlined in the benefits handbook, or available from the human resources department at the client’s place of employment.

Does the client have supplemental medical insurance? What is covered under the policy? A client may need additional cash flow to cover medical costs. For example, Schultz points out even if prescriptions are covered by a supplemental plan, there is often a cap on the amount a plan will cover in a plan year, and the client’s medical expenses could quickly max out the plan benefits, leaving additional expenses that need to be covered out of pocket.

Help clients with health issues

If a client has been diagnosed with a serious or life-threatening health issue, Mark Schultz, an advisor with Sun Life, says you should ensure there’s sufficient cash flow to let the client focus on health rather than the bills.

“If they had invested heavily in equities, moving some of the money to a low-risk, [liquid] investment, such as money market or a daily interest account will provide access to additional funds,” he says.

Psychology comes into play as well. A client facing a serious ailment is inclined to attack a bucket list of things to do before death. “If the client takes the $50,000 for a trip around the world, what will happen to the spouse after the client dies?” says Cairns. “And what if the client recovers and the money is gone?”

Help clients through separation, divorce or other relationship breakdown

Divorce can mean separation of client and advisor, not just of spouses, says Linda Cartier, president of the Academy of Financial Divorce Specialists.

“It is an inherent conflict of interest to continue to advise both parties when they are going through a relationship breakdown,” she says.

If you worked with both partners equally, they may need to choose which one you’ll continue to represent, or you need to refer each client to different financial advisors until the divorce is settled. This should take place as soon as the advisor finds out about the separation.

Relationship breakdowns can also cause privacy issues.

“If the account is held jointly, information can be shared with both parties,” says Cartier. “In other instances, an advisor will need to determine what information can be provided and to whom.”

An estranged spouse is legally entitled to know the value of the investments, but only until the date of separation. If one spouse has left the matrimonial home, the advisor needs to ensure statements are not sent to the former address in error.

If the clients were legally married, then investments, retirement or pension benefits, and assets such as property and debts must be divided equally, either individually or traded against similar- valued assets, and there are provisions for spousal support, if deemed eligible.

Any children born of the relationship must be supported, whether the couple was married or living common-law.

While the separation date is the valuation date, there’s often a delay between the date of separation and the finalization of legal documents to enact the asset-split.

“If a client’s portfolio decreases in value after that time, he or she would still be responsible for the amount specified in the separation agreement as of the date of separation,” says Cartier. “This could have a significant, unanticipated impact on your client’s financial situation.”

Other things to consider:

Is the client married or living common-law?

Who is your client? If you advise both parties, you will need to choose to represent one or the other, or pass them to other advisors to avoid conflict of interest.

Ask to review the separation agreement before it is signed to work in tandem with the client’s legal representative to avoid conflicts or problems with other legislation, such as pension-splitting provisions.

Pension funds must remain locked-in until normal retirement age — they are not available in cash. An advisor familiar with pension products, or who has taken continuing education courses from the Academy of Financial Divorce Specialists will be able to notice potential areas of conflict.

Review the beneficiary designations on investment and insurance products. They will need to be updated unless the client is required to keep a life insurance policy in the spouse’s name as part of the separation agreement.

Will the client need supplemental health and dental insurance? Which makes more sense, paying premiums or having an emergency fund to pay for prescriptions and dental bills? The investment mix can be tailored to provide ease of access to funds in a money market or daily interest account.

Common-law spouses have no legal right to split assets or receive spousal support unless there is a co-habitation agreement. This includes the value of the matrimonial home.

If the clients had been aggressively invested prior to hitting marital troubles, she recommends advisors suggest a more conservative investment strategy to protect a portfolio’s accumulated value.

“Clients may need more liquidity in their investments,” Cartier says, “even if it is just for paying for the lawyer.”

An advisor should review the separation agreement prior to the client’s signing.

“If a provision conflicts with the rules for pension plans, for example, the client will have to go to the expense of having that provision changed.

“An advisor, working in tandem with the client’s legal representative can save time and dollars by pointing out errors or points of financial concern.” Those include provisions that seek to split pension funds for a cash value, which may need to be renegotiated.

Advisors, meanwhile, have to work with the new financial reality a client will be facing after dissolution of the relationship.

“Clients may have the same expenses, but only a portion of the previous income,” says Cairns. If a client intended to retire at age 55, but had to split the value of the portfolio, that goal may no longer be attainable.

“If the client needs more funds, then the portfolio mix will need to be adjusted,” he says.

This can be accomplished by increasing contributions to the investment and the amount of equity holdings, while decreasing expenses or rethinking the early retirement date.

Advisors also need to be familiar with taxation rules. “If the client has had little or no income, he or she may not be used to paying income tax,” says Cairns. “If they receive spousal support, they may be unaware that those payments are taxed as income.”

Says Cartier: “Clients think in terms of the gross amount rather than the net after taxes. This can lead to an unanticipated tax bill.”

Death of a client or spouse

The death of a client or the client’s spouse means significant stress for the surviving partner.

The survivor may be unaccustomed to dealing with financial matters, and may require help learning to budget, to understand finances and to determine how much income they need to meet their daily living expenses.

Other things to consider:

Is there life insurance or other assets to provide for the surviving spouse/children? What will the surviving spouse require for monthly living expenses? Will the assets support expenses and for how long?

How comfortable is the surviving spouse with financial matters? Will the advisor need to start with basic money management?

What risk tolerance does the surviving spouse have? What kind of change of investment direction will be required to provide peace of mind to the surviving spouse?

Will the surviving spouse need additional life insurance, or changes to existing beneficiary designations?

Since he or she may have a different risk tolerance, you’ll need to complete a new investor profile, and then rebalance the portfolio accordingly.

“Advisors need to put themselves in the clients’ shoes,” says Schultz. “Offering support and streamlining the paperwork will ease the transition.”

The death of a spouse can bring unexpected financial realities. “So many marriages may be second or third marriages, and the assets may be left to the children of a previous marriage rather than the current spouse,” says Cairns.

“The client may make financial decisions based on expected income which does not materialize.This is not the time for drastic decisions such as selling the family home or cashing out all the investments. It takes some time for the new financial situation to play out.”

Once clients have adjusted to the new financial reality, advisors should revisit the short—and longterm financial goals and adjust the financial plan accordingly.

For example, if the portfolio was originally limited to 25%-to-30% equities, then the equity percentage could be increased to provide more asset growth.

Or, a small percentage of a conservative portfolio (10%-to-15%) could be moved to a low-risk equity, while maintaining the majority in conservative investments such as staggered-maturity GICs.

Clients can increase their contributions once they have a better understanding of their new realities. As Cairns says, “If you work from the worst-case scenario for the client and build the portfolio from there, everything else is gravy.”

Common-law relationships

Common-law relationships pose special challenges. “The vast majority of clients are unaware common-law relationships have different rules about division of assets and liability,” says Linda Cartier, president of the Academy of Financial Divorce Specialists. There is still a legal requirement for spousal support in a common-law relationship as this is federal jurisdiction, but nothing legal to force the splitting of any assets or liabilities, as these are governed under provincial jurisdiction.

If the common-law partners had created a co-habitation agreement, then it could impose a legal obligation for the division of assets, liabilities and property. Without that agreement, a common law partner could simply walk away and leave the other person with all the debt. If both partners are not named on the title of the matrimonial home, there is no legal requirement to split the value of the property.