The drop in debt levels during the pandemic is likely misleading because many creditors stopped or slowed collections.Rawpixel/iStockPhoto / Getty Images
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Millions of Canadians will be turning to their advisors this registered retirement savings plan (RRSP) season to make good on their new year’s resolutions to get serious about saving for retirement. But many will also be carrying the burden of near-record household debt, now topping an average of $1.77 for every dollar earned, according to Statistics Canada.
While advisors have a regulatory obligation to ask clients or prospective clients about their personal debt levels under the know-your-client rule, they’re under no obligation to tell them if the best advice is to redirect this year’s RRSP contribution toward paying down debt.
“Anybody can walk in and say, ‘I want to make an investment,’ and there are no rules in place that say [advisors] have to look at your debt ratio,” says John Moakler, president and certified financial planner at Moakler Wealth Management Inc. in Toronto. Most of his clients are doctors and dentists, who tend to have massive levels of student debt.
According to the Ontario Securities Commission (OSC), advisors are required to act in the best interest of their clients when recommending investments but are not obligated to recommend debt reduction be given a priority over investing – even when it’s the most prudent move.
The OSC states in an e-mail that in the case of “excessive levels of debt,” advisors must decline to provide an investment product or service to a client. Yet, it does not provide definitions or guidelines to determine what’s considered excessive levels of debt.
Regardless, as annual interest rates on student or consumer loans can top 10 per cent, for example, and even exceed 20 per cent on outstanding credit card balances, it’s vital advisors help their clients set up a plan to pay off debt as soon as possible.
“I would never allow people to carry that much debt. It would be malpractice,” says Mr. Moakler, who factors debt into long-term financial plans for his clients. “I take a look at all of their debts – mortgage, credit card debt and car loans.”
Once he tallies all their debt, he encourages clients to consolidate higher-interest debt into one low-rate loan, often tied to their mortgages through a secured home equity line of credit (HELOC), which normally has an interest rate of around 3 per cent.
“It shows them the trade-off between paying down the debt versus paying down the debt and investing at the same time,” he says. “There’s usually a happy medium in there.”
However, there’s no happy medium in cases where a potential client’s debt is compounding at an overwhelming rate.
“From an investors’ point of view, you should always invest, but that’s not really practical when someone is sitting with credit card debt at 19 to 26 per cent,” says Laurie Campbell, director of client financial wellness at Bromwich & Smith Inc. in Toronto. “If you have a great deal of debt, you’re not going to retire in 20 years. It’s not going to happen.”
While household debt levels have dropped slightly since the onset of the pandemic, Canadians have never been more mired in it. The current figure of $1.77 owed for every dollar of income was less than 90 cents in the 1990s.
Canadians owe over $24,000 per capita when mortgage debt is stripped out, according to Statscan. The agency says credit card balances have been rising on average by more than 20 per cent a year since 2000 up to the pandemic. Canadians owed a total of $90.6-billion on their credit cards as of February 2020 compared with $13.2-billion in 2000.
How the pandemic has impacted debt levels
Ms. Campbell says figures that show the drop in debt levels during the pandemic are misleading because many creditors stopped or slowed collections.
“I believe this is a bit of a red herring in the sense that collection on debt has been non-existent throughout the pandemic,” she says. “We’re seeing creditors become more aggressive now.”
While low interest rates have been the catalyst for Canada’s ballooning household debt, Ms. Campbell says the combination of falling incomes during the pandemic and the promise of interest rate increases from central banks this year could spell disaster for many households.
“We’re going to see a turnaround in 2022 in which people are going to have to start paying the piper and start dealing with their debt,” she says.
Ms. Campbell is calling on the financial services industry to take measures to ensure advisors give debt management a priority over investing for clients drowning in debt.
“I think it should be part of their training and part of the requirements to take a full view of a financial situation,” she says.
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