Financial planning is one of the most important things you can do to ensure your family’s long-term  success. And while many people say they have a plan, only a few do.

According to this J.D Power study, 40% of respondents say they receive comprehensive financial  planning advice.

Turns out, only 7% of them actually do.

The difference is obvious – most Canadians don’t know what a real financial plan is, what it covers, or  what the process is.

Let’s fix that. 

Financial planning is a lot like the medical diagnostic process.

It starts with assessing your history and current condition, and then identifying an ideal future state. It  proceeds to the analysis and development of a treatment plan. Then, your doctor communicates the  results.

The treatment plan includes recommendations, prescriptions, follow-ups, and referrals to other  specialists. It’s integrated, individualized, and collaborative. And as new information becomes available,  it requires updating.

The foundations of financial planning are the same.

Why do I Need a Financial Plan?

According to FP Canada:

• 38% of women and 31% of men have health issues from financial stress.
• 51% say they lose sleep because of it.
• 82% say they have financial regrets.

Those are scary numbers.

The survey also shows that Canadians who work with a professional financial planner were:

• Far less likely to say money was their top concern than those who don’t work with a financial  planner (23% vs. 39%).
• Less likely to have faced health issues due to financial stress than those who don’t work with a  financial planner (20% vs. 31%).
• Much more confident in their financial future than those who didn’t have a financial planner.

Having a financial plan improves your economic outcomes – and your health.

So, what exactly is a financial plan? What topics does it cover, and how do you get one?

What is a Financial Plan?

FP Canada defines a financial plan as:

A written report that addresses an individual’s personal goals, needs, and priorities. It considers  relevant financial planning areas and the interrelationships among them…each section of the financial plan covers the individual’s current financial situation, the analysis performed to  identify issues and opportunities, and the evaluation of relevant financial strategies and  recommendations to help meet the individual’s personal goals, needs, and priorities…a plan  provides a list of action steps, including what needs to be done, by whom and when. 

They further distinguish between a financial plan and financial planning:

…it is an ongoing process involving regular monitoring of a client’s progress toward meeting  their personal goals, needs, and priorities, and re-evaluating financial strategies in place and  recommended revisions, where necessary. 

This is an important distinction. It is the difference between the product – the financial plan – and the  process – financial planning.

A financial plan is a snapshot in time and contains many forward-looking assumptions. Many of these  are external – interest rates, inflation rates, portfolio returns, health concerns, etc. You should review  and update your plan frequently to account for unforeseen changes.

When I present a financial plan to a client, I often say that the only thing I can guarantee about the  projections is that they are inaccurate and that we will need to adjust along the way.

Think of it as taking a paper map on a road trip in the age of GPS. The map is outdated, so you may  encounter roadblocks, rickety roads, detours, or even a change in your desired destination. Plans get  derailed, and you need to course-correct.

Any time there are significant changes in your life – marriage, divorce, a promotion at work, job loss,  business changes, or the birth of a child – update your plan.

What’s In a Financial Plan?

No two plans are alike. That’s because everyone has different needs, and there’s no standard for a  financial plan.

Great financial plans have a few things in common, though. They define, develop, and review your goals,  and design strategies to make them a reality. A plan is only as good as its implementation, but a good  financial advisor will ensure you understand and agree to the recommendations and help you put them  in place.

It should also cover at least six core financial planning topics:

1. Financial Management

Your current and future financial position. A look at your assets, liabilities, income, and expenses.

Recommendations here will discuss savings levels, debt management, and ownership structure of  assets.

2. Insurance and Risk Management

Strategies to manage your exposure to unexpected financial loss due to death, health issues, property  damage, business, and other risks.

Commonly, recommendations will include insurance – life, disability, critical illness, business, property,  etc.

3. Investment Planning

Aligning your portfolio with your purpose. How to best manage your investment assets based on your  experience, attitudes, objectives, constraints, time horizon, risk tolerance and need for income.

Recommendations include asset allocation, diversification, tax location, investment style, fees,  performance, and more.

4. Retirement Planning

Traditionally, your financial well-being after employment has ended. These days though, retirement is  quickly being replaced with financial independence, the day work becomes optional. It’s a comparison of  your desired lifestyle in retirement with your current trajectory.

This includes a review of income needs, sources, and tax outcomes, and should include stress testing of  various scenarios.

Recommendations focus on addressing shortfalls and reviewing pension options, drawdown strategies,  tax reduction approaches, and options for guaranteed income.

5. Tax Planning

This will include your current and future tax obligations and strategies to minimize them. Tax planning is  a critical financial planning area since most financial decisions will have tax implications.

Recommendations on how to deduct, diminish, divide, and defer taxes.

6. Estate planning and Legal Aspects

What happens to your money when you die? Your plan should include a review of your legal situation as  well. This may relate to spousal and child support, family law concerns, or shareholder, partner, and trust agreements.

Recommendations will centre on updating wills, powers of attorney, and healthcare documents and considering ownership structures of assets and probate planning.

Your plan may discuss other topics like education funding for children, charitable giving, small business  considerations, and more.

What is the Process for Creating a Financial Plan?

If you’re creating a plan with a financial planner, it must follow these steps one way or another. These  aren’t always separate meetings, but you can’t have a plan without engaging in each part of the process:

1. Engagement

This first meeting sets the tone, and covers expectations of the process and the relationship. It covers  your needs and the advisor’s philosophy, skills, experience, education, fees, and client service model. By  the end of this meeting, you should know if they are a good fit and whether their service is what you  need.

Of course, if you’re doing a plan on your own, you’ll skip this step.

2. Discovery

The heart of the process is a comprehensive overview of your situation. At this point, your advisor will  ask about your goals and objectives, constraints, family situation, and financial circumstances. They will  ask for supporting documents like tax returns, copies of insurance policies, estate planning documents  and more.

This is the most important step if you’re doing this on your own. Getting organized is one of the most  valuable outcomes of planning.

Once your advisor has collected all the relevant information, they can move on to the next phase – analysis.

3. Analysis

The analysis phase involves assimilating and organizing all the information from the discovery meeting.  Your advisor will create financial projections, usually using financial planning software. They may contact  you to clarify and expand on any data collected during the discovery process. At this stage, your advisor  will begin to identify, evaluate, and test potential financial planning strategies.

4. Recommendations

Once the analysis is complete, your advisor can formulate specific recommendations and action steps to  improve your financial situation and move you closer to your goals. Here you should align with your  advisor on which recommendations you intend to implement, which require revision, and which, if any,  you don’t want to pursue.

5. Implementation

This is where I often see plans fail. A plan is not worth much if the recommendations are not completed.  It is the implementation that moves you closer to achieving your goals.

6. Monitor, Review, and Adjust

You should review your plan with your advisor at set intervals – often semi-annually or annually. This  way, you ensure you have implemented the recommendations and have made them aware of any  changes that may impact your plan. You should reach out between scheduled meetings if there is an  unexpected change in your life, like job loss or inheritance.

Likewise, your advisor should update your plan if there have been relevant external changes.

Not every plan will follow this exact process, and not every plan needs to be this comprehensive. At the  very least, you should know if your advisor plans to cover all these topics over time.

In some cases, it may be more efficient to focus on the most important topics to you right now and leave  the other issues for later. Those topics need to be discussed and reviewed eventually, as they integrate  with the rest of your financial life.

Your advisor may not be responsible for creating the entire plan. Often, advisors will work in teams or  have in-house experts specializing in one or more core planning topics. They should also work closely  with your other professional advisors, like your accountant or your lawyer. This reduces the chance of  getting conflicting advice from different members of your advisory team.

If you’ve never seen or experienced a real financial plan, you may not realize that you don’t have one.  An investment proposal is not a financial plan. Neither is a presentation on how your portfolio has fared.

If your plan hasn’t followed the planning process or doesn’t cover the core planning topics, then you  may not have a plan at all. An incomplete plan raises the possibility that some of the recommendations  may be detrimental to you in the context of the other planning topics.

Since financial advisor job titles are not uniformly regulated in Canada, there may often be a disparity in  the quality of planning between firms and between advisors within a firm. Whether their title is Investment Advisor or Senior Financial Planner, this doesn’t tell you what you can expect from them nor  does it speak to their specific proficiencies or competencies. If possible, ask to see a sample financial  plan that they can share with you – this will help set expectations right out of the gate for both you and  the advisor.

If you are meeting a new advisor or working with one already, ensure you understand the level of  planning and service they provide in exchange for your fees.

And if you’re not getting financial planning as part of that service – what are you paying for?

If you found this helpful, please share it with your friends, family, and colleagues. And as always, if you  have questions or want to chat further – feel free to reach out.

[email protected]

@MarkMcGrathCFP

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