One measure of your success in this business is how well you help clients prepare financially to achieve important life goals. You may also take pride in planning for the experiences and opportunities your clients want to provide for loved ones; planning for the retirement lifestyle your clients envision for themselves; and planning for the legacies your clients want to create for the causes they care about.
With these important life goals in mind, helping your clients preserve the wealth they have worked hard and invested carefully to build may be an equally high priority for you and your clients. For this reason, you may offer clients a variety of protection strategies to help manage risks.
Indeed, you may be helping protect clients from the common and more obvious risks: market performance, income interruption, taxes, long-term care expenses and longevity. But are you and your clients giving thought to common, yet less apparent ones? Imagine how a serious financial need arising out of nowhere may affect the overall financial wellbeing you are working hard to help create.
Why prepare for the unexpected
Natural disasters are a prime example of a financial emergency that could befall your clients at any time, because they are a simple fact of life. Like earthquakes and fires in the west, tornados and hail in the south and central states, blizzards throughout the north or hurricanes and typhoons along our coasts, it seems every region of our country has well-known hazards.
Insurance policies are often the first line of defense. Still, there are often expenses in the aftermath of a natural disaster that your clients need to pay for right away, like finding temporary shelter and repairing or replacing a damaged home. And it may take months before the first insurance reimbursement check comes in. Until then, your clients will be on the hook for these types of bills.
Beyond natural disasters, a financial emergency can also take a number of other forms – all with a similar sense of urgency, and all with a similar level of personal distress for your clients and their families. Your client may call out of the blue one day to tell you they had a bad year in business. Or that they lost their job. Or that a parent or child needs immediate financial support of some kind.
While you can’t predict what kind of financial emergencies your clients will experience, or when they may strike, you can help clients plan for the unforeseen and build strategies into the financial solutions you deliver. This can help your clients feel more secure about their financial futures. It may make them feel more confident about their relationship with you, as well.
The flip side of this coin is: failure to plan has consequences. Because without a plan in place, your clients may have no alternative other than to liquidate portfolio assets to gain immediate access to cash – which may set them back financially and interrupt their long-term investment strategies.
Start by asking questions
Often, the planning process begins with asking a lot of questions. What's going on in your life and career? How are your parents doing regarding their health and finances? Are your kids or grandkids going to college or getting married soon? Are they looking to buy their first home or start their own family?
The answers to these questions may help you and your clients uncover clues to possible risks or life events that may precipitate a financial surprise. The answers may also help you and your clients anticipate what funds may be necessary to respond to any disruptions in their lives.
One key to risk management is knowing risk is always on the periphery. That’s why it is important to periodically reassess your clients’ financial circumstances and so their plans will help give them the liquidity they need when they need it.
Build an emergency fund
A first step you can take to mitigate financial risk is to help clients build an emergency fund; the earlier they are in their financial lives, the better. Three-to six months' worth of income is a good rule of thumb to have available in cash, cash sweep products or cash equivalents.
The amount in your clients’ emergency funds may also depend on their family situations. Based on whether both spouses work and whether they have more than the average number of children, you may want to recommend they increase the amount they set aside.
Using savings accounts to help maximize the interest paid by your clients’ emergency funds may also work. However it is important to make sure the money is liquid and available when your clients need it.
Establish a line of credit
Although many clients view their investment portfolios as potential sources of quick cash, liquidating securities may cause more problems than it helps solve. If markets are down, clients may sell for a loss. If markets are up, it may result in additional taxes.
Either way, there may also be expenses associated with selling securities to factor into the true financial impact tapping portfolios for cash. Plus, there are wash sale rules to watch out for if clients want to re-establish liquidated positions sold for capital losses and taken as deductions on their federal tax returns.
The good news is your clients’ portfolios may offer a strategic source of liquidity for financial emergencies. But first you and your clients need to learn to think differently about borrowing.1
By pledging eligible assets as loan collateral, a securities-based line of credit offers your clients fast and convenient access to funds – often with competitive rates and flexible terms. Unlike selling securities, it can help clients fulfill their short-term financing needs while allowing the pledged securities to continue working toward their long-term investment goals.
Like all investing decisions, there are risks to consider carefully. For example, the pledged assets will be required to maintain a certain value, below which deposits of additional assets or money may be required. Pledged assets may also be sold to satisfy some or all of the loan amount. This may lead to taxes and fees which the client will be responsible for paying.
Be sure you understand these risks and consider making a loan repayment plan a part of any recommendations to clients regarding securities-based lending.
Talk with clients today
If you have not already helped clients plan for financial emergencies that periodically happen in most peoples’ lives, the New Year may offer an opportunity to do so. Now may also be an ideal time to build emergency funds and establish lines of credit – so they are ready before your clients need them.
RBC Clearing & Custody offers a variety of money market mutual funds as well as an interest-bearing cash sweep product to maintain deposits at up to 10 FDIC insured banks for an aggregated total of up to $5 million in FDIC insurance coverage. ($10 million for accounts held jointly)
RBC Clearing & Custody also provides access to a securities-based lending solution featuring a convenient online tool to help simplify the application process and make it easy for clients to request draws, monitor balances and manage repayments.