Plan before product

By Scot Blythe | February 1, 2009 | Last updated on February 1, 2009
8 min read

Canada overflows with designations, some related to the sale of a product, others gradually becoming required for membership in a recognized industry association. One organization, the Institute for Advanced Financial Planning, isn’t seeking to regulate sales or education, but the practice of financial planning itself. Advisor staff talked recently with the IAFP president, Ottawa financial planner Scott Robertson, on his organization’s ambitions and the role of financial planning in a recession and a country where the need for financial planning is probably greater than the demand for it.

Q: Where does the IAFP, and more importantly, the RFP designation come from?

A: If you go back to the Canadian Association of Financial Planners, there was a subgroup of people – integrated, but separate – who had the Registered Financial Planner designation. When CAFP and CAIFA joined hands to form Advocis in 2002, it was decided the RFP would be pushed out into its own separate organization.

To maintain their designation, RFPs have to certify that they’re doing proper financial planning (the six-step process) every year, rather than a plan focused on gathering just enough information to help decide the best product they can offer. Comprehensiveness is key.

RFPs are also required to take a technical and an ethics exam. It’s much more about looking at their practice rather than focusing on what kinds of courses to take.

Q: How does that differ from the CFP, particularly since the new CFP program is incorporating practice in doing a financial plan?

A: As opposed to CFP, an RFP designation suggests a practice standard rather than an educational standard. CFP requiring an actual plan to get a designation quite frankly means more people will be forced into doing that kind of comprehensive planning. It also means there’ll be more interest in becoming an RFP.

Q: With the emphasis on planning, are RFPs fee-only?

A: Of the approximately 400 RFPs across the country, about 25% consider themselves feeonly. Some 25% are not licensed or not selling product; the rest are licensed for securities or mutual funds or life insurance or a combination.

But in this industry, definitions are very subjective. I say I’m a fee-only planner, but very few people in this country operate on my definition of fee-only.

Q: What’s the value in the RFP?

A: The value depends on who the individual is. Lots of people say they consider the designation important because it gives them access to an excellent conference. For others, it’s the ability to sit down and talk with like-minded people.

We’ve set up local networks in the major cities. Ottawa is fairly active; Toronto is active. Vancouver is reasonably active and we’re working out one in Calgary where RFPs can get together on a monthly or quarterly basis.

In some ways the genesis of the RFP was supported greatly by the Quebec and Montrealbased planners, but regulations that came in the 1990s basically eliminated their ability to use the RFP designation. We still have a core of probably 25 to 30, which is pretty good considering they can’t use the designation.

Q: Do you plan to grow the organization?

A: We do. And for no other reason than that we need to grow. We’re losing 5% to 10% members every year to retirement. We’re a fairly grey-haired group. Our objective is not to try to supplant Advocis; we’re always going to be a small group. In our wildest dreams, we’d be surprised to be much more than 600 or 700 or 800 in the next five years.

Q: You have to prove you can do comprehensive financial planning to maintain the RFP. How often does one do that?

A: We’ve certainly wrestled with the role of practice management reviews. I’m not sure how that might evolve over time.

Most people who get into the industry are reasonably honest about when they’re not doing that kind of planning. Every year a couple of people admit their business has really shifted, therefore they just can’t qualify.

Q: Does the conference play a role in providing compulsory continuing education?

A: There’s a continuing education credit, but you’re not forced to go to the conference. There have been proposals to organize it on a rotating basis, but again we have a very diverse membership and there are many who have a ton of equally valid CE credits coming from other top-notch organizations. This year the conference is in London, and we’re expecting more of a Toronto contingent.

Q: How long does it take for someone to qualify for an RFP?

A: Technically, you’ve got to be in financial planning for three years before you can challenge the exam. People who come out of the CFP have experience and challenge the exam pretty quickly. Some get through in a matter of six months or so. Others can take three to four years.

Q: in difficult economic times, you’re forced to define what you do – “do i give advice on the ways to sell a product, or do i give advice.”

A: Right now, the most common comment I’ve heard is “now I really see the value of that comprehensive long-term view.”

Mine are high-net-worth clients. In terms of planning, I always try to leave them with sustainable spending money. Based on a series of assumptions, what can you afford to spend from now until the day you – I don’t say die, we can’t predict that with any sort of certainty – but based on a series of assumptions.

When I see headlines about catastrophes, I take them with a grain of salt. If you have a Nortel pension and tomorrow you wake up and find it’s gone, it’ll no doubt hurt a lot of people. But most people aren’t that reliant on the market.

Q: How do you plan for sustainable spending? Do you have a terminal date?

A: It’s a serious mistake when people think of the terminal date as the day they retire. I think the terminal date is when you die.

When people say I’m two years away from retirement and I have to change my asset mix, I don’t follow that logic at all. I think the asset mix is much more related to how risk-averse the individual is. It’s more personality-related than how old you are or where you stand in the lifecycle.

Q: How about spending? the absence of financial planning shows up in the housing market, don’t you think?

A: One of the things I find frustrating is that the demand for proper financial planning is nowhere near as great as the need is. People make some incredible assumptions. One of my pet peeves is when people do their financial planning assuming 10% or 15% returns on the market. They jump to online calculators and put in their expected returns and say, “Oh gee, I’ve got no problems.” But there aren’t too many 10-year periods where you can get those kinds of returns.

For a taxable portfolio, I assume a 0% growth rate after tax and in- flation. So I’m assuming clients are going to be able to maintain their purchasing power after tax, and not much more. When you put that kind of numbers into the system, it really has a significant shift, because what it’s really saying is if I don’t spend it, it’s not that I’m going to be able to invest and make a whole lot of money on it, I’m just going to be able to spend it another time. The emphasis then is on how we’re implementing it: What will you do with the cash flow that’s coming up?

People have to be very careful about the assumptions they make. Obviously, if I were to plug into my models a 15% equity return, my clients would be in a very different situation than they are in.

Q: Another misnomer, i think in this environment, is that you can sustain a certain level of spending without a job.

A: How much of this is dependent on me having a job for the whole period of time, or having those bonuses coming in every quarter? I don’t take into account bonuses when I do planning; if I do, I do so reluctantly.

Tremendous pain and suffering are caused when people make financial decisions without a second opinion from an advisor. I give the example of the woman with the $400,000 mortgage, who hadn’t figured out anything except, “can I afford the monthly payments. And if I can afford the monthly payments, what does it mean to my lifestyle?”

Q: Well, we’ve certainly been through this before, in the early 1990s. What have people learned?

A: I don’t like planning, because I think in some cases having a plan is more dangerous than not having one. At least if you don’t have a plan, you don’t have to worry. It depends on your focus. I don’t want to make general statements, but often what happens is clients get a plan that’s 70, 80 or 100 pages long and they read the first three pages and say, “I’ll get to it next week.” And three years later they come back and say, “Can you just change the date on that and give me a new plan because nothing’s really changed.”

The key doesn’t lie in having a plan, but in working the plan. One of the ways I differentiate myself in my personal practice is by being on top of things when working the plan with my clients. They get a monthly evaluation of the portfolio; and a monthly focus on their savings plan. Every six months, if not more frequently, we sit down and do a net-worth statement.

Sometimes people are deluded into thinking they have a plan. I’m a little like the chart master on the sailboat. I know we’re here and I know we want to go there, there’s the plan. But that’s not the real value of the plan. It’s not about drawing a straight line from A to B; it’s about knowing you’re not on a straight line, and then devising a plan as to how to get back on that straight line.

Scot Blythe