Pandemic debt a tale of two client realities, which advisors must recognize

The pandemic has caused debt problems for two groups of people – those who’ve lost their jobs and burned through their emergency funds, and those who want to accelerate their dreams – so financial advisors need two tracks to help them.

“It’s two very different tales. This is not a shared financial experience across all people,” Shannon Lee Simmons, a financial planner and founder of the New School of Finance, told WP. “One of them is a survival thing, and the other is utilizing and leveraging assets to create wealth, which is very different.”

Income disruptions

During the pandemic, she’s run micro-financial sessions for anyone whose income was disrupted, so has seen clients who hadn’t worked with a financial planner before. “Finally, they were able to get qualified advice during this time when they needed it the most,” she said. “There’s a demand for people who want help to navigate through these uncertain times when every dollar counts.”

About 30% to 40% of her clients’ income ended when the pandemic began as they were self-employed or entrepreneurs, primarily in the service or entertainment industry, so owned retail stores, coffee shops, or restaurants. Less than 10% are in that position now because they’ve either found other work or pivoted to get business income from takeout or delivery.

While these clients were financially fine when the pandemic began, its length has taken them by surprise. “Maybe they don’t have rising debt because they had emergency savings,” she said, “So, they were prepared for something, but they weren’t prepared for how long it’s gone on.”

Some were able to get the Canadian Emergency Response Benefit (CERB) for awhile, and now may be working part-time but not earning as much, so have gone into debt to cover expenses and survive.

“They’re unsettled because they’ve now gone through their emergency funds and been on a shoestring for 15 to 18 months, so they’re wondering: how much longer can it go on before I have to take on debt to survive? Or do I have to make some major life changes?” said Simmons.

The key thing financial advisors can do for these clients is develop a plan to cut back their expenses, so they can rebuild their emergency fund and regain some financial security once their income returns. They need to prioritize emergency funds and liquidity over long-term retirement planning until then. While it would be great for them to have six months of savings, she figures three months is more realistic to achieve, especially since the government has provided CERB and EI.

Accelerated dreams

Those who didn’t lose income, meanwhile, are making major moves.

Simmons has seen a huge rise in home equity lines of credit for renovations and purchasing second properties. Renovation costs have escalated while there’s been a massive surge in home prices and interest rate decline, so she said there’s been “a big uptick in equity lines of credit and refinancing to pull the money out to do those big renos or buy a second property.”

“I’ve never seen the emotional urgency that I’m seeing now,” she added. “People who were saying they want to renovate in the next ten years suddenly want to do it in the next ten months or ten weeks. It’s almost like panic spending.” 

“I feel like this pandemic shifted and reprioritized things in people’s lives,” said Simmons, noting people have spent less on social obligations, such as weddings, showers, birthdays, and after-work socializing, as well as commuting. “I think people realize they don’t miss spending all that additional money. So, we’re seeing a lot of emotional urgency in where they are spending money because it feels very important.”

Even though these clients retained their income during the lockdown and have equity in their homes, so this spending looks affordable on paper, Simmons recommended that advisors ensure their clients are “making a decision right now that they’re going to be proud of ten years from now.” They should not overleverage so they can’t meet other demands, such as paying down their mortgage, preparing for retirement, or contributing to their investment portfolio. “You want to make sure they’re secure and not overstretching.”