Tuesday 2 April 2013

Financial Planning is a lot like Dieting
Our world is complicated.  We work hard every day and strive to do better.  And most of us believe we will continue to do better and better over time and when we get to a certain point in our lives, we will have enough wealth to sit back and enjoy the fruits of our labour.  That’s the conventional wisdom.  And for some it works out just fine.  Others are not so fortunate.

I have worked as a Financial Planner with many people over the years and have identified some flaws with this conventional wisdom:
a)      Sometimes we reach a ceiling in our careers and cannot do better and better like we expected.
b)      Sometimes the world can throw a wrench into our plans which can set us back significantly (i.e. depression, divorce, health issues, job loss, investment / business loss).
c)      Sometimes we allow our expenses to get out of hand and our rate of wealth accumulation can decline or even cease for a period of time.
d)      Sometimes our investment expectations are not met or the investment markets have declined significantly and we feel we are not adequately prepared for retirement.

Although these flaws are often unforeseeable, having a Financial Plan will reduce the uncertainty or risk of not being prepared for the point in your life where you need to slow down or stop accumulating financial assets – the point when you’ll have to rely on pensions and investments to support your lifestyle. 

More and more often I encounter client situations where their ability to continue working has been impeded and their accumulated wealth cannot support their lifestyle well enough into their retirement years (and given the number of medical successes it is not unrealistic to assume a lengthy retirement).  If it is found that they are projected to outlive their investments some options include a severe tightening of their belts and / or significant downsizing of their residence(s).  And I believe the added stress of financial uncertainty can actually result in premature death.

To ensure we will be successful I believe Financial Planning is not about buying a portfolio of mutual funds or enhancing your investment returns using sophisticated computer simulations to optimize your asset allocations.  I believe Financial Planning is like “dieting”.  It is necessary to set realistic targets and pay attention to the important details.  And if something changes the targets need to be revised.  This is how you’re assured to achieve financial success.

You need the following ingredients to Financial Success:
1)      You need to understand your current financial situation.

a)      You need to have clarity about what you have and what you owe.
b)      You need to know how much you earn, how much you spend and how much you’re saving.

2)      You need to develop a financial plan for the future.

a)      You need to consider how you think your future will change:

i)                 How your job(s) might change.
ii)                How long you think you will continue working.
iii)               How you expect to transition to retirement (i.e. will you stop cold turkey or will you phase out).
iv)               How your expenses will change.
v)                How you will fund things on your wish list (i.e. renovations, recreation properties).

b)      You need to understand what is reasonable to expect from your investments.

c)      You need to understand what insurance is necessary to ensure you and your family members are adequately protected from death or accident / illness.

d)      You need to consider how you want your wealth distributed to your family if something were to happen to you.

3)      You need a process to ensure your plan is kept current:

a)      Your plan needs to be revised to reflect those changes not foreseen in the prior version.

b)      Your plan needs to consider revising your insurances up and down as risks are increased or decreased.

c)      Your plan needs to monitor your investments to ensure they are producing the expected results.
Our view of Financial Planning

We feel objectivity and fiduciary responsibility too often are taking a back seat to product sales.
We feel proper and objective financial planning is generally too costly for most clients.  It takes many years for a financial planner to develop a solid financial planning foundation (including pensions, cash flow, insurance, estate, financing and investments) and unless the financial planning process is highly automated, most financial planners will opt for the higher compensation earned by selling insurance and investment products and services.  It is the logical path.

It is not that financial planners are all motivated to sell investment and insurance products.  It’s just that the financial planning process we feel is necessary to provide clarity about how your financial future is expected to play out and how much flexibility you have to take on side-projects (i.e. cottage, renovation, etc.) is rarely undertaken if the true objective is to sell investment and insurance products.  We feel Financial Planning has become too focused on selling mutual funds and insurance products and the necessary analysis for a proper financial plan has been neglected or diminished along with the quality of advice.
The true benefits of Financial Planning are:

1)      You will understand where you stand and what you need to do.

2)      You will understand your options and degrees of flexibility to do things that you may not have considered possible.

3)      You will have more clarity regarding your long range plan – leaving less to chance.

4)      Ongoing Financial Planning reviews will identify value-added solutions that will improve your outcome incrementally each and every year.

5)      Your financial resources will be optimized.
We feel that for creative and effective financial planning solutions Financial Planning requires objectivity but also requires input from the sales community to collaborate on ideas.
We have created strategic relationships with like-minded professionals (those who sincerely believe the clients’ interests are the priority) to optimize productivity and creativity in our financial plans.  Our business model prefers that money management and insurance acquisitions are carried out by our own hand-picked advisors.  This way a portion of their fees and commissions will be used to subsidize the cost of the financial planning services – the cornerstone of what we believe will improve your success.  (Our clients of course will have the option to maintain their investment and insurance relationships but for this independence their services will not be subsidized and therefore their fees will be higher.)  Also by choosing to work with external advisors there is a propensity for the financial plan to take sabbaticals from time to time.  In other words in the dieting analogy, if the process is fragmented there is a higher likelihood of going off track and bingeing.

Our process includes the preparation of a comprehensive financial plan and a complete annual review process.  In addition we prefer to have a semi-annual review with the investment advisor / counselor to address asset mix and performance.  We feel that it is important that your investment advisor / counselor understands that you are paying attention.  This way they will pay closer attention to your account.
Stronach Financial Group Inc.