The value of financial-planning services

Recent economic woes and job uncertainties have led to increased interest among many Canadians, including the baby boomers, in their financial health. But although the media is rampant with discussions on financial planning, there are still very few individuals who have the confidence and security of an understandable plan that addresses their financial and other life goals.

Financial vs. investment advice

I often ask people if they have a financial advisor, and if they’re satisfied with them. The common answer I receive is “Yes, I do have one, and I’m happy with him or her because he or she made me money.” But when I press whether they’re referring to an investment advisor or a financial advisor, their eyes glaze over and they become quiet.

A July 2010 report from the Investment Funds Institute of Canada, entitled The Value Of Advice: Report, says “Statistics Canada reported in 2006 there were more than 288,000 Canadians employed in financial and investment advisory businesses. These Canadians are employed in the provision of a variety of financial and investment advisory services including: the setting of planning targets; the choice of the right vehicles to reach those targets; and the development of asset allocations matched to client needs.”

This report clearly makes the case for advice, but focuses on investment management. And so the issue continues, with many people equating financial planning with investment management. Financial planning just isn’t clear in the mind of the public.

The financial plan

It’s obvious most people don’t know what a financial plan is; it’s our job as advisors to educate them. Essentially, a financial plan takes a client’s current situation and develops a plan to meet his or her financial and other life goals.

The current situation would include a calculation of the value of the client’s assets and liabilities, as well as details on current income and expenses. Consideration must then be given to pre-retirement goals, which might include having children; balancing off maternity leaves and child care; and providing the clothes, food, activities and education for them as well as for discretionary family lifestyle decisions concerning travel, cottages, clothing, entertainment, cars, etc. The planning process

The process works well when clients understand and believe in the plan. But before the fun begins, a distinction must be made between plan inputs, which the client can control, and plan assumptions, which they can’t control.

The inputs (or goals) should be varied and tested until they produce an acceptable plan, and should include pre-retirement inputs such as debt repayment, house acquisitions, children’s activities and education, a desired lifestyle (travel, entertainment, clothes) and maybe a second residence. It should also include retirement inputs, such as the age the client wants to retire at, whether he or she will continue to work part-time, what his or her desired lifestyle is, if there are legacies or other estate matters, and whether the client will have the ability to provide for potential future medical expenses.

Assumptions, meanwhile, are things outside the client’s and planner’s control. They could include things like inflation rates, income tax rates and market returns on various asset classes, such as registered or non-registered market investments, principal residences, second residences and business investments. If assumptions are clearly defined and conservative, the credibility of the plan is significantly increased in the mind of the client. But if the plan doesn’t work with conservative assumptions, the inputs should be changed — not the assumptions.

Most plans also include a retirement plan component, but it’s important to recognize that there are several different and distinct stages of retirement, all with different costs.

Generally, what people most want to know is how much money they’ll have to spend on things like travel and entertainment while in an active stage of retirement, when they still have the hips and hearts to enjoy them, without compromising their financial well being at a later stage, when they might have need for medical expenses.

A less active stage of retirement, meanwhile, might see a downsizing from a house to a condo or to an adult community. This could free up some cash and mean lower activity-related expenses, but could also mean higher medical and lifestyle support expenses.

Inflation is a critical assumption and warrants specific mention; how it’s handled in the planning process is very important to the client’s understanding and the credibility of the plan. Basically, clients understand current dollars and inflation rates. They understand that currently it may cost $3,000 a month for extra nursing care for a 90-year-old. They also get the idea of a 2% inflation rate. But for a 40-year-old, this future number would be in excess of $8,000 per month — something they’d likely not understand or embrace, but nonetheless something they should be aware of and plan for. Major obstacles

People generally spend more time planning their next vacation than they do planning their financial future. This is incredible, but true.

They look after their medical health by going regularly to doctors and following their advice. They also look after the health of their cars by having regular checkups and routine maintenance.

People want to plan for their financial well being too, but don’t know how. They confuse financial planning with investment management; they’re bombarded with confusing media messages; they don’t know who provides the service; they don’t understand the process, benefits or output; and they think it’s too expensive and takes too long. When this happens, they just shut it all out and concentrate on their next vacation.

On the other hand, there are many highly qualified planners who would dearly love to be able to offer plans to all their clients. This would deepen and strengthen their relationships with existing clients and differentiate them from other planners. But these advisors don’t understand or aren’t focused on the right questions. Most also don’t have a system to demo the process, benefits and costs; don’t have a single, routine process to service all clients; and don’t have a flexible system that permits them to economically offer this to clients of all sizes and complexities.

In addition, advisors often don’t have a clear process to market themselves to the public.

Adding planning services to a practice is a significant decision for a planner. It can impact daily routines and how he or she markets himself or herself. But planning services are also a vehicle to help connect the advisor with his or her clients on an emotional level through the development of understandable plans that address financial and other life goals.

A first step, then, is to determine what services advisors want to provide, and find or develop the tools to support a single process that’ll allow them to economically provide their desired level of planning service. The service should be flexible enough for clients of all sizes and complexities and be able to grow with a client. The process should also be easily understood by the client and easily demonstrated.

If the same process is used every day for every client, planners become very familiar, comfortable and confident using it. And with this confidence, planners can advertise and promote themselves, and demonstrate their process and services to the public, which in turn substantiates their value in a now-educated client’s eyes.