Rate hikes are choking off avenues for UHNW business clients
When the Bank of Canada hiked its policy rate another 25 basis points yesterday, even clients with higher assets felt the squeeze.
“It’s impacting everybody,” Sue Derlago, a senior wealth advisor and senior financial planner for the Calgary-based MLD Wealth Management Group with Canaccord Genuity Corp., told Wealth Professional.
“A lot of the families that we work with were using cheap debt to manage their businesses right up until we started raising rates in 2022. Prior to that, it was a great tool to accelerate growth of personal wealth. But this higher interest-rate environment that we’re potentially going to find ourselves in over the near term is really starting to have an impact on that dynamic because they’re not going to be able to use that lever of cheap debt as an accelerator in the same way they had been in the past. That’s one of the biggest changes that I’m seeing.”
The Bank of Canada increased its overnight rate to 4.75% with the bank rate set at 5% and deposit rate at 4.75%. It pointed to the fact that, while the consumer price inflation was dropping, largely because of lower energy prices than a year ago, the inflation rate was remaining “stubbornly high”.
The bank said economic growth around the world is softening in the face of higher interest rates, but central banks are signalling that interest rates could keep rising to restore price stability. Consumer demand for goods and services is still strong and housing sales have also picked up recently.
The bank also said that, with core inflation still running at 3.5% to 4% and excess demand persisting, its Governing Council thought the inflation rate could get stuck well above the bank’s 2% target. Its monetary policy may not be restrictive enough to bring it down, so it said it will have to keep evaluating various economic factors as it is “resolute” in restoring price stability.
MLD has been working with its clients - who generally have at least $2 million in investable assets – to reduce their debt. Derlago said these families don’t generally need to take on debt. But when money was cheap, it was a great strategy for business owners whose income and assets can “make their way up to the family level”. Higher inflation already had them rethinking their financial plans, but higher interest rates mean there’s more concern about carrying significant lines of credit or debt in their businesses now. So, MLD is working with them to rethink that debt strategy’s effectiveness.
“We’re seeing business owners rethink their spending plans and maybe not take on new projects or new investments in their businesses because some of those pretty affordable lines of credit that used to exist are just not there in the same way that they had been in the past,” said Derlago. “So, we’re definitely starting to see the impact of that with folks who have businesses and their ability to take their funds personally out of those businesses.”
It’s also impacting clients personally as they work with MLD to adjust the factors they can control.
“We’re very fortunate that we work with families that are in a very strong financial position, but we’re putting a lot of time and energy right now into readjusting spending plans because they’re finding we have to start making some decisions on the discretionary spending since we don’t know how long these rates are going to remain elevated,” she said.
While MLD has been helping its clients to navigate the impact of inflation, it’s now recommending that some postpone discretionary expenditures for six to 12 months until the interest rate environment could change. That includes home renovations, property upgrades, vehicles purchase, or significant trips. MLD is also working with them to aggressively pay down debt and work out how the parental generation can help their adult children get into the housing market. Interest rates are climbing while property values remain high, so many parents are growing more concerned that their children may be priced out of the housing market.
“If we look at the conversations that we’ve been having over the last several months, people are definitely starting to change their spending plans and hold off in areas I would consider non-essential,” said Derlago. “So those are the big things making an impact right now from a financial planning perspective as we’re working with our clients to address this new reality.”
