via Advisor.ca | June 13, 2012
Single female clients will soon comprise more of your book.
Data from the Vanier Institute for the Family finds more than half of 80-year-old women live alone at some point, compared to less than a quarter of men the same age. What’s more, the same report says only 46% of women and 44% of men are now expected to marry by age 50. While financial-planning basics don’t change for singles, there are issues to keep in mind. First, the Conference Board of Canada finds women earn $0.79 on the dollar compared to men. Second, single women can’t access the same tax-saving options as married couples. Their earnings can be further hit if they need to take time off to care for children or aging parents; or if they’re disrupted by a lengthy illness or disability. Kristi Buchanan, an advisor with Sun Life Financial in Victoria, BC, says advisors sometimes make inaccurate assumptions about singles. For instance: “They’re not married, so they don’t have relationships that could impact their financial decisions.” That’s not true. Siblings, nieces, nephews and even friends could all influence single clients’ estate plans. To suss out these ties, Buchanan asks whom they care about most; whom they consult on financial matters; and who they want to have inherit their money. Kathryn Jankowski, VP and Financial Divorce Specialist at T.E. Wealth in Toronto, takes it a step further. “I invite [influencers] to appointments. The plans I put forward have to have acceptance from them as well.”
Financials for one
Jankowski’s single clients think about money differently. While her married clients tend to be concerned about the big picture, singles focus on spending and saving.
Having only one income means singles are less able to build up a cash buffer. They have to cover all necessities, including retirement savings, before considering discretionary expenses, like cable television and annual vacations. She recommends they also set aside at least six months of living expenses—more if they’re self-employed or work in high-turnover sectors.
Also important but often overlooked: insurance. “Never assume single clients don’t need insurance because they don’t have dependents,” says Buchanan. “All efforts to build wealth and provide retirement options can be undone in an instant if a major illness strikes. Discussing disability, critical illness and long-term-care insurance are a must.”
For singles who own large homes as a result of inheritance, divorce or widowhood, Jankowski suggests they consider downsizing or turning them into income properties, especially if gross housing costs (calculated as mortgage payments, maintenance fees, property taxes and utilities) start overtaking 33% of monthly spending. She’s told clients, “Downsize to half and you could retire five years earlier.”
In a hot market, renting out part of the house can offset expenses, but “if you have to pay to make a basement rentable with a separate [entrance and] kitchen, the costs may outweigh the benefits,” she says. Becoming a landlord also means having to account for vacant months and a new set of maintenance costs that stem from having non-owners under your roof. Further, rental income is taxable, so net revenue will depend on the client’s marginal tax rates.
For clients hoping to buy homes on a single income, Kim Dewar, portfolio manager at Odlum Brown Limited in Vancouver, suggests saving aggressively in RRSP accounts so they can avail themselves of the home buyer’s plan.
“[These clients] have a much lower margin for error, which reduces the portfolio’s ability to accommodate volatile investments,” she says.
For savings plans under three years, Dewar recommends high-quality fixed- income investments or GICs. Clients who will buy homes in five years could add a small portion of blue-chip equities to their allocation.
She says companies like Apple have consistently provided growth, while banks and utility stocks counter with stability and income. Dewar also diversifies the equity portion of the portfolio across the 10 global industrial sectors.
When singles are feeling bullish, Dewar advises they err on the side of caution.
She makes sure clients maximize their RRSPs; put leftovers in TFSA accounts; and channel additional surplus into conservative blue-chip stocks, bonds or GICs.
“A 60-40 equity-to-bond allocation is considered a good mix for many clients,” Dewar says. “When markets do well, we sell some of the equity and buy fixed-income, and vice versa to keep within the prescribed allocation range. By sticking to a strategic asset allocation, we force ourselves to sell high and buy low.”
Nancy Graham, an Ottawa-based portfolio manager at PWL Capital Inc., targets inflation. “You don’t want to be too conservative. Not taking risk can also be big for these clients. If you think about where fixed-income rates are, and where inflation and taxes are headed, very conservative portfolios may not provide what you need in retirement.”
A passive manager, Graham’s portfolios comprise thousands of Canadian, U.S. and international securities. She also allocates to fixed-income, REITS, high-yield bonds and income trusts. Her mantra: minimize expenses through low-cost funds and ETFs, capture market returns, and manage taxes once assets spill outside RRSPs.
“Markets are difficult to outperform over long periods of time. That’s why we own the market, tilt for value and small premiums, and stay away from idiosyncratic risk of single-security holdings.”
While taxes are secondary to risk management, reducing them increases returns. Each year-end, Graham reviews her client’s portfolios, sheltering taxable gains where possible, or practicing tax loss harvesting where clients can benefit.
“If we have clients with big capital gains, we may be able to realize an offsetting loss by moving within the asset class, or holding different securities within a similar risk profile. Let’s say a client has a REIT that’s been doing well. In rebalancing holdings, we may sell a portion of this holding and realize capital gains. [If she has] unrealized losses in an international asset class, we may realize a portion of those losses to offset the gains.”
Estate planning comes with added complications for single, childless women, since the choice of executor isn’t always obvious. Clients often use this as an excuse not to write a will, but you should explain the consequences (potential delays; dishonoured wishes; probate costs; frustration for family) of not having one.
Executors should be younger to ensure they’ll be alive when clients die. Dewar recommends selecting alternate executors in case the original choice is unable or chooses not to act. Jankowski further suggests picking executors from the same province, or at least the same country, because it makes the process simpler. And the will must also specify that executors can hire legal and accounting help.
Clients can use corporate executors when they don’t have a relative who fits the bill. If it’s a difficult estate, they can be appointed to handle the technical problems in conjunction with a family member, who takes care of the personal matters.
Using professionals will also protect clients if they grow apart from loved ones over time.
Despite these complexities, singles are typically confident, self-sufficient, and willing to work with investment partners. Those qualities make them great clients.Print PDF