How to talk to clients about debt

As interest rates rise, so do the costs of servicing mortgages, credit card balances and lines of credit. As a result, conversations with your clients regarding these forms of debt could become more prevalent in the months ahead.

Having frank conversations with your clients about their debt can help prevent serious financial problems down the road.

Doug Hoyes, licensed insolvency trustee with Hoyes Michalos in Toronto, said he’s “very specific” when initiating conversations with clients about debt and cash-flow issues.

His first step is to ask the client basic questions such as who they owe money to, the amount they owe and the interest rate on each debt. Next, he’ll ask the client about their monthly income and prepare a budget. He also asks them to list their assets.

“First, you have to take inventory,” Hoyes said. “Then, based on the answers to those questions, we get as specific as we can with them.”

Taking inventory and doing a budget is an effective approach, he added, because the client gets to see their financial situation — and potential solutions — in writing.

“For example,” Hoyes said, “what are the minimum payments you need to make every month just to stay even? Most people haven’t added that up. If you just make your minimum payments, how long will it take you to get out of debt?”

James Bilcox, a financial advisor with Sun Life Financial Inc. in Calgary, said he views debt management and client conversations around debt within the context of a holistic financial plan.

“In the same manner that we would review and examine the investment or savings strategy of a client’s balance sheet, we’re also examining their debt, making sure that we’re trying to help them reduce their interest costs to get them out of it faster,” he said.

“When we onboard a client,” Bilcox continued, “we’re doing a proper evaluation of their current financial situation and we’re listening [to] their objectives and what’s concerning them. If debt management is one of their concerns, then we’re prioritizing strategic direction in that area.”

Bilcox said he prepares cash-flow plans for clients who need that service.

Lynn Williams, certified financial planner and owner of the Lifestyle Protector in Vancouver, said she’s “purposeful” when initiating conversations about debt and cash-flow issues with her clients. Williams typically encourages clients to do a cash-flow plan and a financial plan when they start their engagement with the firm, as those are two of the firm’s specialties.

“It can be hard [for financial advisors] to have that conversation with clients, tapping into a casual conversation, if they’re not familiar with the work or maybe haven’t done it before,” Williams said. “We’re very clear that ‘This is not a budgeting exercise. This is about getting you to understand your cash-flow numbers’.”

Knowing those numbers will enable clients “to make meaningful or purposeful decisions,” she said.

Williams added that she and her firm don’t like to use the word “budget” in client consultations. “I don’t believe tracking your budget and trying to keep track of all the little details is helpful,” she said. “In fact, it can actually be quite demoralizing if you go back and look at your credit card and see what you spent on it. What we’re trying to help clients with are guidelines for using money in a way that helps them achieve their aims and aspirations.”

Rising interest rates have prompted some clients to ask Williams about floating-rate loans. She noted that the amount clients pay on such a loan depends on the type of loan and the institution.

“Other lenders have actually increased the amount that you have to pay if you have a floating rate,” Williams said. “It just depends on the product the client has.”

One of the Lifestyle Protector’s guiding principles is ensuring clients’ house-related expenses are not more than 35% of their take-home income. Williams said some clients may feel that the only way they can acquire or maintain a home is if they spend more than that 35%.

“They feel like they’re putting all their money into that home,” she said. “When we start to see that, or have them see that percentage pop up more, particularly if an interest rate bumps up, then we start to have conversations like, ‘How do you increase your income? How do you decrease your costs? Do you sell something?’”

The first debt-related solution Hoyes typically proposes is to determine whether the client can solve the issue on their own. For example, the client might explore increasing their income by getting a second job, or reducing home expenses by moving in with someone else.

If none of those options are viable, then Hoyes will propose the clients file a consumer proposal or file for bankruptcy.

Bilcox noted that clients who have a long-term pattern of over-spending could find themselves in a difficult spot, whether as a result of high interest rates or other factors, such as job loss or illness.

“We’re trying to keep people inside their means,” he said. “But if there’s sort of a passive behavioural reason why maybe they’re overspending, how are they financing that? They’re probably financing it from a deficit, like a line of credit or overdraft. We have to [help them] get out of that, perhaps provide financial literacy.”

Williams agrees. Her advice to other advisors discussing debt with their clients is to have the conversation while bearing the client’s whole financial picture in mind.