What a K-shaped recovery means for your book

This article appears in the Fall 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

When you set up a temporary desk at home from which to keep track of crushing market news and nervous clients back in March, you probably didn’t imagine that many parts of the world would still be experiencing some form of lockdown in October, with Covid-19 cases rising again. Nor did you envision still working from the same improvised space almost eight months on — the thought would have been too depressing.

You may not have expected stock markets to have largely recouped their losses, either, or that three-quarters of the 3 million jobs lost in Canada would have returned.

Early in the pandemic, recovery talk focused on three letters: V, U and the dreaded L. The latest arrival to the game of recessionary Wheel of Fortune is the letter K. And it’s probably already shaping your book of business.

Evidence of the K-shaped recovery (the term popularized by Peter Atwater of Financial Insyghts, with credit to @IvanTheK on Twitter) is widespread. Equities markets have ridden tech gains to new highs while the list of bankrupt retailers has grown. In credit markets, it’s never been easier for consumer staples and homebuilding companies to borrow, while airlines and hotels suffer. In Canadian real estate, home prices and sales set records, while office vacancies rise.

The K is evident in the contrast between the staggering collapse in economic growth and a rise in consumer spending; in severe unemployment and record household savings.

It may also be evident in a growing divide among your clients.

Clients who’ve kept working through the pandemic have likely increased their savings — out of caution (job insecurity, or finally creating an emergency fund) or simply because there have been fewer spending opportunities. Those able to stay invested last spring, or to use the market sell-off as a buying opportunity, are doing quite well. These clients present an enviable challenge, but a challenge nonetheless: How should they invest an unexpected windfall at a moment when equities look expensive, bonds offer little or no reward, and the economic outlook is far from reassuring?

Then there are the clients on the K’s downward slope. Formerly solid earners — business owners forced to close for weeks and suffer through months of lukewarm recovery, for example — may be unexpectedly drawing from accounts and securing loans to stay afloat. Demand for advice may be greater than ever, but your book doesn’t grow based on need.

Before the pandemic, you may have been onboarding clients’ children: low earners today who would become viable clients sometime in the future. In many cases, the pandemic has stalled that trajectory, with job losses disproportionately affecting the young and graduates entering a dismal job market.

The challenge now is to make a K-shaped book work. The pandemic has forced you to dramatically adapt your practice since March. Fewer long drives for house visits and weekly hours lost to commuting has freed up time; so have tech platforms to onboard clients and manage accounts remotely.

Continuing to adapt will allow you to grow your book by taking on more accounts, even if they’re smaller at the moment. They likely won’t remain that way forever.

The lopsided recovery may have long-lasting effects. The pandemic’s punishingly uneven impact is pushing social inequality to the front of the political queue. This could mean higher corporate taxes in certain jurisdictions, cutting into profits, and redistributive tax policy to rebalance pandemic winners and losers. Such policy would affect portfolios as well as clients’ wealth, particularly the large accounts.

The pandemic has led to talk in policy circles about not letting a crisis go to waste. The phrase may sound cynical but, when it comes to your book, the outcome needn’t be.

Mark Burgess is managing editor of Advisor’s Edge. Email him at markb@newcom.ca.