How to Talk to Clients About Debt
Doug Hoyes, a licensed insolvency trustee at Hoyes Michalos in Toronto, said he was “very specific” when starting conversations with clients about debt and cash flow issues.
His first step is to ask the client basic questions such as who he owes money to, how much he owes, and the interest rate on each debt. Next, he will ask the client for his monthly income and prepare a budget. It also asks them to list their assets.
“First, you need to take inventory,” Hoyes said. “Then, based on the answers to those questions, we get as specific as we can with them.”
Taking inventory and budgeting is an effective approach, he added, because the client can see their financial situation — and potential solutions — in writing.
“For example,” Hoyes said, “what are the minimum payments you need to make each month just to stay even? Most people haven’t added that. If you’re just making your minimum payments, how long do you will it take to get you out of debt?”
James Bilcox, a financial adviser at Sun Life Financial Inc. in Calgary, said he views debt management and conversations with clients about debt in the context of a holistic financial plan.
“In the same way that we would review and review the investment or savings strategy of a client’s balance sheet, we also review their debt, making sure that we are trying to help them reduce their interest charges to get out of it faster,” he said.
“When we onboard a client,” Bilcox continued, “we make an appropriate assessment of their current financial situation and we listen [to] their goals and what concerns them. If debt management is one of their concerns, we prioritize strategic direction in this area.
Bilcox said it prepares cash flow plans for customers who need this service.
Lynn Williams, a certified financial planner and owner of Lifestyle Protector in Vancouver, said she was “resolute” when she started conversations about debt and cash flow issues with her clients. Williams generally encourages clients to establish a cash flow plan and a financial plan when they begin their engagement with the company, as these are two of the company’s specialties.
“It can be hard [for financial advisors] to have that conversation with clients, tap into casual conversation, if they’re unfamiliar with the job or maybe they’ve never done it before,” Williams said. “We are very clear that this is not a budgeting exercise. It’s about making you understand your cash figures”.
Knowing these numbers will allow customers “to make meaningful or helpful decisions,” she said.
Ms Williams added that she and her company don’t like to use the word “budget” in client consultations. “I don’t think tracking your budget and trying to keep track of all the little details is helpful,” she said. “In fact, it can be quite demoralizing if you go back and look at your credit card and see what you’ve spent on it. What we’re trying to help customers with is guidelines for how to use credit card money. in a way that helps them achieve their goals and aspirations.
Rising interest rates prompted some clients to apply to Williams for variable rate loans. She noted that the amount clients pay for such a loan depends on the type of loan and the institution.
“Other lenders have actually increased the amount you have to pay if you have a variable rate,” Williams said. “It just depends on what product the customer has.”
One of the Lifestyle Protector’s guiding principles is to ensure that clients’ home-related expenses do not exceed 35% of their net income. Williams said some customers may think the only way to own or keep a home is to spend more than 35%.
“They feel like they’re putting all their money into this house,” she said. “When we start to see that, or they see that percentage show up more, especially if an interest rate goes up, we start having conversations like, ‘How do you increase your income? How do you decrease your costs? Are you selling anything?”
The first debt-related solution that Hoyes typically offers is to determine if the customer can solve the problem on their own. For example, the client might consider increasing their income by getting a second job or reducing their expenses by moving in with someone else.
If none of these options are viable, then Hoyes will offer clients the option of filing a consumer proposal or declaring bankruptcy.
Bilcox noted that customers who have a long-term pattern of overspending could find themselves in a difficult situation, whether due to high interest rates or other factors, such as job loss or sickness.
“We try to keep people within their means,” he said. “But if there’s some kind of passive behavioral reason why they might be overspending, how do they fund that? They’re probably funding it out of a deficit, like a line of credit or an overdraft. We must [help them] out of that, maybe provide some financial literacy.
Williams agrees. His advice to other counselors discussing debt with their clients is to have the conversation with the client’s overall financial situation in mind.