How can advisors, dealers keep a K-shaped economy from creating a retirement crisis?

Each month at WP we offer a slate of articles and content pieces that go deep on a particular topic. This February, we're focusing on retirement. 

In the short-term, a K-shaped economy is just another macro trend for advisors to monitor. The phenomenon, largely observed in consumer behaviour, shows a higher degree of consumption, savings, and wealth concentrated in high income earners. Low-income earners tend to buy less, save less, and accumulate less. While observed inequality may immediately prompt advisors to adjust their consumer discretionary allocations towards luxury goods, the phenomenon lends itself to a potentially deeper and more challenging issue: how lower income Canadians struggling to get by will access retirement?

Amanda McKenna still believes it’s possible for Canadian families earning the median after-tax income rate of $70,500 per year to retire. McKenna is an associate portfolio manager at Verecan Capital Management. She has seen how inequality, inflation, and a rising cost of living has made retirement saving more challenging for her clients. Achieving retirement, she explains, takes hard choices and serious planning. She argues that advisors can be difference-makers in keeping a K-shaped economy from becoming a real retirement crisis.

“What it comes down to is how we are having these conversations,” McKenna says. “We talk about making sure that clients’ investments can address inflation, keep up with the cost of living, and keep them from running out of money. That all comes down to financial planning and putting plans in place. Having stress tests to make sure you know if X, Y, or Z happens. Making sure we have a little bit of a buffer so that they’re in a better place come retirement.”

McKenna is having those conversations with her younger clients, not just pre-retirees. Acknowledging that the sooner people start saving for retirement the better off they will be long-term, McKenna explains that those conversations with younger investors often start with core financial literacy topics. She notes that many clients may come to her with a specific request, maybe to open an RRSP, only for her to ask a few questions about their goals and realize they’d be better served by a TFSA. That balance of core education and tailored advice, she says, can help clients achieve better long-term financial outcomes.

Those conversations can be challenging for clients, and they might struggle with the possibility of trading some short-term desires for their long-term retirement goals. Those younger clients can also struggle with feelings of hopelessness, a sense that their financial goals are so far out of reach that saving doesn’t matter. McKenna has seen that hopelessness firsthand and stresses how important planning can be in addressing it.

While individual advisors can make a difference through plans, McKenna argues that firms can make an even greater impact by freeing their advisors and removing fee minimums. While the incentives of a fee-based model are geared towards serving wealthier clients, McKenna believes that by opening up access to smaller account sizes, and treating those clients as longer-term investments, the industry can both make a greater impact and help safeguard its own long-term future.

From a business standpoint, having more clients with smaller accounts may seem challenging, but McKenna notes that a full-service advisory firm can still find profit from a number of services. That can include coordinated advice around areas like insurance, mortgages, or tax planning, depending on a client’s needs. Tax services, she notes, can be hugely impactful for lower income Canadians who often miss out on benefits by using low-cost tax filing services. Doing that work also allows the advisor to gain a more fulsome view of their client, and help them to build meaningful wealthy.

Technology can also help make the provision of these services more efficient and profitable. McKenna notes that her own firm has stayed abreast of technology and automation to drive efficiency. The trouble can come, though, when personalization is sacrificed to make services more efficient. Individual advice for unique individuals remains a core value, and McKenna believes that more advisory firms can provide that service to a wider swathe of Canadians. Removing account minimums may seem challenging, but McKenna’s question to other firms is about who they really seek to serve.

“I’m not saying this is an easy thing to accomplish. When we remove minimums we remove the natural behaviour of large institutions to maximize profits in the short-term, but we do it to give Canadians improve access. You need advisory firms to look with more of a long-term focus,” McKenna says. “You have to focus on your values of helping Canadians no matter where they’re at. Eventually it will pay off, but it’s a long-term investment. If you’re committed to it, then you will prioritize actually helping clients not being focused on shareholder benefit.”