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.
DANIEL F. STRONACH
B.A., CFP, R.F.P.
Stronach
Financial Group Inc.