How one advisor has prepared his clients for an economic downturn

Evan Riddell wasn’t surprised yesterday morning when Statistics Canada announced Canadian GDP had contracted 1.1%, a faster downturn than the Bank of Canada had predicted. Riddell is a CFP and  lead at Riddell Private Wealth Management, part of IG Private Wealth Management. While he notes that GDP falling faster than expected was newsworthy, Riddell has been preparing himself and clients for a slowdown for several months.

Now that shoe appears to have dropped, Riddell told WP how he’s been positioning client portfolios to deal with the major macroeconomic forces at work today. He outlined some of where he sees opportunity and noted some of the ways he’s prepared clients psychologically and emotionally for a looming downturn in the Canadian economy.

“Going back through 2022, as we saw the drawdown and impact of interest rates going up on every asset class, we went through lifeboat drill style meeting with all our clients. We talked about what’s happening in the broader economy and talked about what’s happening in our clients’ portfolios and how that’s reflected here,” Riddell says. “We find that when people read the doom and gloom on the news, they don’t always fully reflect on what is actually impacting them. It’s typically quite a rare situation that what’s happening on the broader market has as direct of an impact on our clients because they usually have a much more balanced portfolio approach.”

Context is key to Riddell’s approach and as he coaches clients through difficult moments, he draws a direct line between what’s occurring and what impacts they will actually see. At the same time, through his ‘lifeboat drill’ meetings he prepared clients for a few portfolio shifts to better capture opportunities and weather downside risks.

Riddell has been overweighting fixed income in clients’ allocations for several months now, looking at the asset class as more attractive ahead of peaking interest rates. On equities he’s stayed neutral to underweight, making some geographic shifts recently. The more significant slowdown in Canada has prompted Riddell to reduce clients’ Canadian equity exposure while adding a little bit more exposure on the US side. It’s an allocation strategy typified by calm, defensive positions with plenty in the mix to capture short-term opportunities as they arise.

The ’lifeboat drill’ meetings he’s been having for the past year means clients are well prepared for these shifts in their portfolios. Nevertheless, we live in a constant news cycle and it’s easy for clients to get spooked by what they see and hear every day. When clients come to him with fears, or email him scary articles in the small hours of the morning, Riddell tries to invite a frank conversation unpacking exactly what the client is afraid of and why. In those conversations Riddell can add context to those fears and connect them directly to what is happening inside a client’s portfolio. He also works to arm clients with the income and the understanding they need to face a frightening moment.

Riddell specializes in retirees and pre-retirees, so his approach is to always keep enough cash in clients’ portfolios to cover their expenses over the next 18 months. He keeps them well allocated to fixed income, too, as a typically secure and safe asset capable of holding up through downturns. That allocation can provide years’ worth of income if needed. That means if the growth side of a client’s portfolio starts falling, they know they have the cash and the income to last through a prolonged downturn and still participate in an eventual recovery.

As other advisors talk to their clients about Canada’s economic weakness and the risks of a recession, Riddell thinks that calmly drawing a clear connection between what will likely happen and client portfolios can help a great deal.

 “We’ve been talking about the trajectory we’ve been going in, with inflation coming down and high interest rates pushing us closer to a recession. We’ve been explaining how that will result in the Bank of Canada possibly taking their foot off the gas,” Riddell says. “If we do see less of a soft landing and a recession come about, we talk about how the Bank of Canada’s main tool is to cut interest rates. We talk that through with clients proactively, outline where they’re at and how to put them in the best possible position.”