Adapting to the Generational Wealth Gap: A Call to Financial Advisors

Ian Wood, CFP, CIM, MFA-P

In this final installment of our three-part series on the financial challenges facing younger generations in Canada, we delve into the role financial advisors can play in guiding their clients through these tough economic times. In the first part of the series, we analyzed the alarming rise in consumer and business insolvencies, particularly among younger Canadians, drawing attention to the gravity of the situation​​. The second part of the series provided insights into the potential benefits of referring financially struggling individuals to Licensed Insolvency Trustees, rather than resorting to immediate bailouts. Now, in this third part, we explore how financial advisors can become better equipped to advise their clients on managing debt and planning for future financial security.

The economic landscape in Canada is shifting dramatically, creating unique challenges and opportunities for financial advisors. One of the most significant changes is the rising wealth gap between generations, with seniors becoming wealthier while younger Canadians are increasingly struggling with insolvency​¹​. Concurrently, the senior population, despite their newfound affluence, is burdening an already strained healthcare system, especially in the realm of nursing and residential care facilities​²​.

As insolvencies rise across the nation, with a significant 59.1% increase in May 2023 compared to May 2022, younger Canadians are finding themselves particularly vulnerable^​1​. This is exacerbated by the fact that seniors now control more than a third of all wealth in Canada and are disproportionately beneficiaries of government subsidies and tax breaks³​​.  Simultaneously, the financial strain on the public healthcare system is intensifying, with public nursing and residential care facilities operating at a deficit of nearly $937 million in 2021, a figure that has tripled since the onset of the pandemic​. Private facilities, while still profitable, have seen their profit margin decrease due to increasing operational expenses​²​.  By focusing on the immediate situation instead of projecting for the future, seniors may be overconfident in their ability to financially support their children due to underestimating their own future living expenses.

As financial advisors, it is crucial to understand these dynamics and devise strategies to assist clients across the generational spectrum. For younger clients grappling with insolvency issues, advisors should provide education about debt management, budgeting, and financial planning. Given the rising popularity of consumer proposals, advisors should also be equipped to guide clients through this process, contrasting it with the more traditional bankruptcy route​¹​.

For seniors, a crucial task is to help them understand the broader social and economic implications of their newfound wealth and to navigate the complexities of wealth transfer. There is an opportunity to educate clients about the potential for intergenerational wealth transfer and the tax implications of such decisions. This not only addresses their financial security but also assists in the potential alleviation of financial strain on their descendants.

Moreover, given the financial pressures on both public and private healthcare facilities, financial advisors can play a pivotal role in planning for long-term care. The cost of care, whether in a private or public facility, is increasing, which could lead to higher out-of-pocket expenses for seniors in the future. Ensuring clients have appropriate long-term care insurance and estate planning can help protect them from future financial risks.

Layered on top of this already sensitive matter is the issue of elder abuse, specifically financial exploitation.  Financial exploitation occurs when someone improperly or illegally uses an older adult's funds, assets, or property for personal gain.  According to the Department of Justice, 60% of offenders are relatives of the victim, often the child or grandchild⁴.  By using an emotional appeal that the child is “facing bankruptcy”, they may just be manipulating the client into gifting funds that were not truly needed for the purpose given.  By encouraging the parent to refer their child to a Licensed Insolvency Trustee, you offer a layer of protection against this exploitation because a licensed insolvency trustee is not going to assist the child with this fraud.

In conclusion, the evolving economic landscape in Canada presents both challenges and opportunities for financial advisors. By taking a proactive approach, we can assist our clients navigate these complexities and promote financial stability and intergenerational equity.

Bottom Line: financial advisors play an integral role in educating younger clients about insolvency, debt management, and financial planning, while helping seniors understand wealth transfer and long-term care planning implications.

References:

1. Office of the Superintendent of Bankruptcy Canada. (2023). Insolvency Statistics in Canada—May 2023 (Highlights). https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/insolvency-statistics-canada-may-2023-highlights
2. Statistics Canada. (2023). The Daily—Nursing and residential care facilities, 2021. https://www150.statcan.gc.ca/n1/daily-quotidien/220418/dq220418c-eng.htm
3. Statistics Canada (2023). Table 36-10-0660-01Distributions of household economic accounts, wealth, by characteristic, Canada, quarterly
4. Government of Canada. (n.d.). Crime and Abuse Against Seniors: A Review of the Research Literature With Special Reference to the Canadian Situation. Department of Justice. https://justice.gc.ca/eng/rp-pr/cj-jp/fv-vf/crim/sum-som.html