Advising a laid off client

For an advisor, this means taking stock of the client’s financial status, investments, insurance, retirement benefits and perhaps even their state of mind.

Checking a client’s financial status starts with assessing income needs, explains Douglas Nelson, CFP, nineteen-year veteran of financial planning and president of Winnipeg-based Nelson Financial Consultants.

Nelson starts with an assessment of cash requirements and urges clients to distinguish honestly between needs and wants in order to assemble a revised budget. This can involve value judgements, since needs include groceries and shelter, but wants include cable television and other discretionary expenses.

This phase includes assessing which contributions to registered plans, ranging from Registered Retirement Savings Plans to Registered Education Savings Plans or Tax Free Savings Accounts, can be postponed until the client starts earning income again.

“What I have found in all of those situations is that they don’t need as much as they think,” he says.

This exercise reduces the panic level for a client, who soon realizes that he or she does not have to replace all lost income. One couple discovered they could get by on $30,000 after tax.

Related Articles
• Advising laid off clients • Help laid-off clients save on tax • Jobless clients need advisors’ help

“It changed the entire conversation,” Nelson recalls.

Where the laid off client as nearing retirement, this phase can mean taking stock of potential new sources of supplementary income such as consulting contracts. Since clients have learned to distinguish between needs and wants, they may not have to work a full year to cover income requirements.

After this process, clients throw off the understandably bleak view that follows the loss of their jobs.

“They’ll come in and they’ll be distraught and distracted and feeling like a failure and all of those emotions that come with that,” Nelson says. “When you turn around and send them out the door, they’re feeling empowered.”

For job-threatened employees, the process includes heading off potential problems with debt, according to Roy Vokes, CFP, a 30-year veteran of financial services and branch manager at the WorldSource Financial Management office in Kleinburg, Ontario. A secured line of credit often utilizes home equity as collateral. It can cost between $500 and $1,000 in assessment fees, but comes with a lower interest rate, usually only 50 or 100 basis points above prime.

An unsecured line comes with no application costs, quicker approval and a higher interest rate, usually around prime plus 3% or more.

In either case, a fired employee generally has no obligation to inform the bank of the change in status unless the bank asks in a review.

It also pays to take stock of the advisability of topping up the RRSP, according to Vokes. This involves checking the individual’s cash needs and presence or absence of a high salary, bonus or large severance package. Where available funds allow, a large deposit before the annual RRSP deadline will generate a useful tax refund in the year after dismissal.

Meanwhile, where the employee falls into a lower tax bracket in the year after dismissal, an RRSP withdrawal might become tax effective as well as useful. That gives a client the best of both worlds, a tax deduction in a high income year and an income payment in a low income year.

Vokes also checks the employee’s history with the former employer, since regulations allow deposit of a retiring allowance from the severance package into the RRSP without affecting RRSP contribution room. Regulations allow deposit of up to $2,000 per year of employment at the same employer for years prior to 1996.

The employee’s insurance may also provide some slack in troubled times. Where the individual has a universal life or whole life policy, the inside accumulation account may contain enough cash to cover premiums. Meanwhile, cancelling the term insurance policy can cause problems since the client will have to re-qualify for a new term policy at a later date.

Transferring money from the employer’s pension plan to a locked-in retirement account may not be the most tax efficient move, according to Nelson, since the funds in a LIRA funds must be left intact until the individual reaches 65 years of age. It might be in the individual’s best interests to keep the money in the employer’s pension plan.

“If it’s a registered pension plan which allows the individual to receive payments and allows the individual and spouse to obtain the $2000 pension credit before age 65,” it might be in (the client’s) best interests to keep that money there for the time being,” he says. In this scenario the two spouses each claim $2000 in pension income credits, creating tax savings for both of them.

---

Lay-offs can cut both ways: Have you ever been laid off from your dealer? How did you stay in the industry? Tell us your story in the Advisor Forum.