What is Financial Plannning anyway?

Everywhere one turns these days, there is someone or something offering financial planning. The problem for the consumer is how to differentiate between someone dressing up a product sale as a financial plan and doing proper financial planning.

When I first entered the financial world I did so at the time of the now famous ‘Freedom 55’ commercials that were seen on almost every channel one watched during primetime. People would often call up and say, “I want a Freedom 55 plan”. What most people failed to realize was that it was simply a marketing concept and not a specific product. Despite that, there were many insurance advisors selling it as a one-stop shop product. Thankfully, the financial world has come a long way from then, or has it?

It is my opinion that we have not. I cannot begin to count the number of times that I have seen, read or heard someone talk about financial planning only in order to sell a single product. Often this tactic is from a mutual fund salesperson or an insurance salesperson who ultimately will take all available money and deposit it into the product flavor of the month. Or better yet, the clerk at the local bank or credit union branch who sells mutual funds for that bank only and is referred to as a financial advisor.

This is not a diatribe on whether or not the manner in which a salesperson or consultant is paid, but rather a commentary on the idea that it is important to understand what financial planning really is as it is not a product sale.

It is my view that financial planning involves a holistic approach to everything that has to do with the money of individuals (single person, couple, family etc). As such, I believe that there are five primary areas that need to be spoken about and addressed in a proper plan. They are: (a) Cash Flow Management; (b) Risk Management / Insurance; (c) Tax Planning; (d) Investment Planning; and (e) Estate Planning. If one area is left out, then the plan is a precarious one. It is akin to going to a doctor with a pain in your right foot’s big toe. The doctor takes a look and recommends lopping off the toe as there is nothing to do. As opposed to the doctor taking a full medical history that looks at everything from your family history to what you do for fun. After doing that, the doctor is far more apt to be able to determine that the shoes you are wearing are too small for you. Further, based on your family history of diabetes, you should be very careful about caring for your foot and they refer you to someone who specializes in the area of concern.

Let’s take a brief look at the five areas and speak to the items that might be discussed in each area. The first area is Cash Flow Management which is the area that one investigates first in order to determine if you have a positive monthly cash flow or a negative one. If negative, then that would be important to know before one recommends a product that you cannot afford in the first place. It is also the area that determines if one is aware of the manner in which they spend money. This area should also investigate how you go about setting aside money for emergencies, retirement etc. From there, one can look at how someone is banking, where they presently hold a mortgage, have they maximized their credit score etc.

Once you determine what a person’s cash flow looks like, then you can progress to the second area – namely the protection of the cash flow against emergencies and catastrophes. This area is the dreaded insurance area and is integral to any financial plan. It does not necessitate one purchasing insurance but it does mean that one should learn what their potential exposure is to issues of life and how best to accommodate them if not through insurance. Many people have their homes insured and their cars insured because they ‘have’ to. Unfortunately not as many have properly protected themselves for other areas of insurance. Insurance is not simply a life insurance plan that pays out when you are dead, but also insurance for everything from protection of your TV to protection of your income. In many instances, insurance is the most cost effective way of protection against loss, independent of whether it is loss of life, loss of ability to earn an income, loss of financial choice or loss of a place to plug your cable into.

Then we jump along to the area of Tax Planning. Very few people spend more than a quick second discussing tax planning with prospective clients. I am not sure why, but the number of people I have met who have a pension plan and are still maximizing their RRSP is numerous. What is baffling is that they have a spouse but no spousal RRSP or have never put a penny into a TFSA. That is one of the simplest ideas to tax planning – making sure that there is income splitting being done in a familial situation and minimizing the amount of tax a person pays. If you think that is bad, the number of people who are earning less than $30,000 but are struggling to borrow money to put into an RRSP during RRSP season is likewise too many for my fingers and toes to tally. All I can say is tsk tsk to the financial people who ignore offering some simple tax planning advice that can benefit their clients immensely and save them many thousands of dollars. It also behooves any financial person to know a few accountants that they can refer their clients to for any in-depth planning. I always say to people, “I know enough to get us into trouble, and then who to turn to in order to get us out of trouble”. They chuckle, as do I, but I am aware of my limitations. I find it incredibly unfortunate that so many advisors do not even speak to the idea of tax planning other than you get to deduct your RRSP contribution from your income.

Speaking of RRSP contributions, the next area is that of Investment Planning. In this area, you find an inordinate number of ‘salespeople’ referring to themselves as financial planners only to put money into their fund of choice. Whether you are a fee only advisor or a commissioned sales person, or any permutation of the two, dealing with a client’s investments does not equal financial planning. Is that emphatic enough? Investments may be a large part of one’s ability to reach their financial dreams and goals they have been set, but there is far more to a proper plan. When it comes to investment planning, too often advisors/salespeople will focus their attention on one side of the balance sheet only – namely the asset side – at the expense of the other side and their client’s best interest. When you figure into the equation the impact of taxation (another reason to know how to speak to tax planning); It is not always sensible to put someone’s ‘safe’ money into a daily interest plan that advertises a higher than average interest rate. Rather, it is wiser to apply the same money against an outstanding line of credit or other debt which they can then re-borrow against at a later time if they need to. In the meantime, however, the rate of return on the money in question is far greater. So learn to speak to both sides of the balance sheet as there are many people who are ‘mortgage free’ but have a line of credit that is ‘mortgage size’.

Once you have looked at the previous four areas, you must also look at the issues I refer to as Estate Planning. This can be as simple as ensuring that your client has a Will and Powers of Attorney in place so that in the event that they cannot speak for themselves, a legal document appoints the person(s) that can. If one were to add up all of the money that the various levels of government, the courts and lawyers make each year because someone has failed to implement the simplest of legal documents, then that ‘one’ person could live out their lives very comfortably. Also relevant in this area are the laws surrounding what happens to people’s assets and liabilities in the event of a matrimonial (common law or otherwise) breakdown. Realistically, how can you propose a Spousal RRSP if you do not know what happens to it in the event that a client no longer wants to see their former love of their life? Many clients are averse to discussing such things as co-habitation agreements or pre-nups because they do not want to plan for the breakdown or be seen to be thinking about it – so you bring it up and no one is the target but you; your shoulders should be big enough to carry that weight.

This article may sound like a rant because in many ways it is. Unfortunately the financial industry in Canada today (likely elsewhere as well) allows for advisors, of all walks of life, to use the title financial advisor or financial planner without there being any consistency from one to the next. I am certainly not proposing regulation of the term. More regulation will only police those who do not listen to the regulations in the first place. I find it pitiful that those who sit behind a desk and have never sat in front of a client dictate what is right and what is wrong. What would be great to see is people pronounce themselves as a specialist in one area, or in all – not professing all and doing only one. Whether you are a consumer reading this or an advisor, it would be great to see more people learn what financial planning is all about.