Strategies for clients struggling with inflation

With inflation running higher for longer, many Canadians are feeling the impact of rising interest rates on their financial well-being. 

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The Bank of Canada is expected to conclude the year with one more interest rate hike on Wednesday, sending mortgage rates to levels not seen since 2008. Carissa Lucreziano, vice-president with CIBC Financial and Investment Advice, said advisors should review borrowing and credit expenses to determine whether clients have any credit products affected by interest rate increases.

If clients have a loan, line of credit or mortgage with variable rate interest, their payments have increased by approximately 3.25% since last March, she said, and it’s an advisor’s job to walk clients through their options.

“This is a big decision on many clients’ and many Canadians’ minds right now if they’re in that situation,” she said. “They’re thinking about it now. They’re looking for advice now.”

Lucreziano said advisors can walk clients through different scenarios to help them understand what their options are so they can feel more informed to make a decision that best suits them.

Further, she recommends advisors engage their clients’ family. “Consider identifying where partners, spouses or even parents can be weaved into that planning conversation,” Lucreziano said.

Advisors can also examine where clients’ expenses have increased and identify ways to optimize savings. For example: reviewing debt payments and overall credit owing, and creating an updated plan based on how much discretionary income they have each month. 

Based on the amount of excess funds available each month, she recommends allocating some to an emergency fund or setting up an investment plan for RRSPs and TFSAs, for example. Alternatively, if cash flow is tight, advisors can encourage clients to decrease their contributions — “but if they don’t have to,” she said, “don’t stop them completely.”

A budget is a good way to help clients understand and manage their finances, Lucreziano said. Advisors can share financial tools to help clients understand their situation and plan for the future, such as a budget calculator or cash-flow tool. 

Lastly, Lucreziano said to look at clients’ investment strategy and ensure their asset allocation still matches their risk tolerance.

“One of the most important pieces to consider is staying focused on the plan,” she said. Especially because, until recently, most clients haven’t had to worry about the impact of inflation on their investment returns. 

Inflation was both low and stable for an entire decade, she said, but that is no longer the case. 

“Given lower expected returns and higher expected inflation, it’s important to have enough to protect investments against loss of purchasing power,” she said. 

For risk-averse investors, advisors can emphasize high-quality dividend growth equities, she said. For example, Canadian equities offer an attractive dividend yield compared to other developed markets and have held up well against inflation so far, given the country’s strong energy sector. 

Regardless, Lucreziano said advisors can reassure clients and help them remain focused on their long-term goals by emphasizing the importance of their investment plan and sticking to it. 

“If goals haven’t changed and portfolios still make sense, it is often better to leave the portfolio as it is, possibly with small tweaks, and give time for the market to recover and benefit from longer-term compounding of wealth,” said Lucreziano.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.