Caution the watchword for wealth advisor
The market expected the Bank of Canada to hold its key interest rate steady this week, even as inflation has begun to slow. But advisors are still monitoring the impact of continued high rates on their clients’ debt and financial plans to ensure they’re well positioned to face a potential recession.
“The Bank of Canada held its key interest rate. That was what the market expected, primarily because the Federal Reserve only hiked the interest rates in the US by a quarter basis point a couple of weeks ago,” Laura De Sousa, a wealth advisor and client relationship manager in Nicola Wealth’s Vancouver office told Wealth Professional after the bank’s position was announced.
“The Bank of Canada felt it was appropriate, in this current economic environment, to hold rates at the current level and assess economic data as it comes out and then decide what to do and how to pivot going forward.”
After eight straight rate hikes in the past year, the bank held its key policy rate at 4.5% - the highest level since 2007. Despite data on GDP growth and employment suggesting that the economy is still strong, the CPI numbers have shown that inflation seems to be decelerating. But, the bank noted inflation continues to be stubborn, so may remain above the bank’s 2% target until 2025.
“We’re definitely trying not to make any promises that we can’t deliver or predict something that’s completely out of our control with regard to future expectations and how clients should adjust their financial plan,” said De Sousa..
She noted that, given the economic environment – with interest rates and inflation still high and a recession expected later this year or early next – she’s working with clients to see what they need.
If they’re retired with no debt or mortgage, the current interest rates are attractive because clients’ earnings are earning more interest, so their portfolio will ultimately benefit from a higher yield.
But, for those clients who still have debt on their balance sheet, De Sousa noted that their advisors are assessing the impact of the interest rate on the debt and whether it would help the clients to use part of their investment portfolio to pay off the debt. But, the advisors are also looking at whether it makes more sense to continue to carry the debt if the interest is tax-deductible.
“So it really depends on the client’s situation, goals, and objectives,” she said. “It’s very unique to every person and every situation. So, there isn’t a cookie cutter approach.”
Nicola Wealth’s advisors are also shifting parts of clients’ portfolios into fixed income asset classes to collect a higher yield for a lower risk asset class, but, she noted, “that’s a tactical shift and it could change, depending on the economic environment.”
It’s particularly salient with a potential recession looming, she said, “so we feel it is appropriate to be a bit more defensive and be cautious with how we manage the portfolio, and a bit of overweight to fixed income is appropriate in order to collect that higher yield from mortgages from our private debt asset classes and then our bonds, as well.”
Given all that clients have faced in the last three years and could still be facing, De Sousa said, “when we shift portfolios or make adjustments, we try to include as many outside events that could impact the short and medium-term outcomes, and we’re cautiously optimistic about the future.”
