YOUR PRACTICE-Debt management helps advisers help clients
* Advisers often focus on client investments, not debt
* Many advisers lack training, confidence in debt management
* Increased fee transparency may make debt management a must
By Andrea Hopkins
TORONTO, April 4 (Reuters) - A common misconception among Canadian wealth managers is that their best clients don't have debt, but with more households carrying red ink into retirement, advisers now need to look at both sides of the balance sheet.
Canadians have embraced credit. The ratio of household debt to personal disposable income reached a record high 165 percent in 2012 - up from 66 percent in 1980, according to Statistics Canada. This means that, in aggregate, households owed C$1.65 for every dollar of disposable income.
Financial advisers are trained to sell insurance and investments, and they often don't know where to begin with debt management, and prefer to believe clients don't need that kind of help.
"The most common reason advisers stay away from debt management is because they are under the illusion that many of their clients, who are buying investments or insurance with them, must not need any debt management," said Stephanie Holmes-Winton, who specializes in teaching advisers about debt management in her Money Finder training program.
"They tell themselves that to feel better: 'If I don't look at it, it is not there.' But statistics show that 76 percent of average Canadians have debt, and 59 percent of retired Canadians have debt. So they are fooling themselves," Holmes-Winton, a Dartmouth, Nova Scotia-based financial adviser, added.
A 2012 study by Statistics Canada showed the same people who were most likely to consult financial advisers, with the highest incomes and highest standards of financial literacy, often carried the highest debt load.
The rationale is simple: People with high incomes are more likely to qualify for loans, from mortgages to lines of credit.
"It is consistent with the idea if you have more income you have more capacity to take on debt," said RBC economist David Onyett-Jeffries.
While the prevalence of indebtedness should be motivation enough for advisers looking to expand their client base, industry veterans say a looming rise in standards for fee transparency in the industry may force the hand of advisers who have relied on sales to make a living.
A shift to published fees may make Canadians aware that fee-based advisers - often those with the certified financial planner designation - may be offering a better level of service than commission-based advisers, who make a living from selling mutual funds and other products.
"At some point all of the fees are going to be transparent, and if advisers are not doing financial planning, at a certain point clients are going to see what are they earning, and they are going to ask about the C$10,000 in fees," said Robert Abboud, an Ottawa-based certified financial planner and co-founder of AdvisorPractice.com.
"Advisers, if they want to keep the assets, need to focus on helping the client right from the get-go with the debt, because at some point clients are going to say 'I need help with this and (my current adviser) can't do anything about it'."
But training is lacking. The typical financial adviser may be licensed to sell mutual funds. Some have trained to be financial planners, which broadens their mandate. But many don't know where to start with debt management.
Holmes-Winton said the goal for advisers is to help clients with cash flow in a bid to not only eliminate debt, but also find more money to invest, benefiting both the client and adviser.
The first hurdle is training. Holmes-Winton has taught 227 advisers about structured debt management, but she knows that hardly scratches the surface, and convincing advisers to invest in their own education can be a hard sell.
Once trained, however, adding the service to an adviser's practice comes down to boosting the information gathered from all new clients to identify those who need help with debt.
Approaching existing clients about debt management can be tougher. Since the question was never asked in the first place, clients may fear being judged because of their debt. Holmes-Winton suggests sending a survey to a handful of clients at a time, teasing out who needs help with debt, and who will bring in the most new cash flow from the service.
"It means a little more time investment upfront, but it tends to generate new revenue that is buried in your book of business and you didn't even know it was there," she said. "It is not uncommon for advisers to find C$50,000, C$60,000, C$70,000 in revenues that can be generated in the first six months (of surveying clients)."
Abboud said all clients who come through his door get a financial plan - which may take 15 hours for an adviser to complete. The service comes with an upfront cost to clients, which can be hard to sell when a client just wants to invest money, not spend it on a plan. But Abboud said it is worth it.
"It will solidify the relationship for life because you are helping them with something that is a big deal - more than the markets going up and down," Abboud said.
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