THE BLOG

Does Your Financial Plan Make Any Sense to You?

10/22/2013 05:59 EDT | Updated 01/23/2014 06:58 EST

Is your financial plan just a bunch of numbers crunched to the point of no return?

I often wonder if the general public has any idea about what really goes on within the financial services industry. When they take the step towards planning for their financial objectives, are they receiving the best advice available or simply the most available advice?

Case in point: A Canadian financial publication came out this month claiming almost 82 per cent of financial planners create financial plans for their clients, yet only 51.5 per cent of these clients have a financial plan.

Indeed, these two figures are confusing -- if advisors are creating all these plans, why does it appear that 30 per cent of the clients they created them for don't have them?

(Personally though, I don't believe that even 1 per cent of the public actually has a financial plan!)

Through my 33-plus-year career, I've asked thousands of prospective clients to show me copies of their existing financial plans -- and only once did someone have one.

Now you may think that my 1 per cent figure is too low, but let me lay the foundation of my theory. Let's start with the definition of a financial plan and what the process is to create one.

According to the Financial Planning Standards Council [FPSC]:

"Financial planning is a comprehensive, iterative process. The following steps should guide your planner. Be familiar with them. They'll help you get the most out of the process. And remember, it's this big-picture approach that sets financial planners apart from all other financial advisors who may have been trained to focus only on one aspect of your finances."

• Establish the client-planner engagement;

• Gather client data; determine your goals and expectations;

• Clarify your present financial status; identify any problem areas and opportunities;

• Develop and present the financial plan;

• Implement the financial plan; and

• Monitor the financial plan.

(citation excerpted from FPSC's website http://www.fpsc.ca/node/309)

So, what areas should your plan cover? According to the FPSC, there are two types of plans: comprehensive and limited. Here's how the organization defines each of them:

Comprehensive Plan

The main financial advisor has provided financial planning for major life goals and events, or at least three of the planning components: household budgeting, tax, retirement, estate planning, investing, debt- or risk management."

Limited Plan

The main financial advisor has provided advice or services related to one or two of the planning components.

Therefore, if what the industry is calling a "financial plan" is "limited" in scope, then perhaps the original assertion is correct; that indeed, more than 50 per cent of clients do have financial plans.

But that begs the question: are they really plans?

Pull up the Shade

In my experience, often what is being pawned off as a financial plan put forward by an investment advisor, in actuality is nothing more than a retirement or investment plan produced via number-crunching software--a rote, robotic plan that provides little or no value to an individual client. Should someone be paying to have a computer plan their retirement? Shouldn't the public be demanding more?

Where's the discovery process in that? Where's the advisor's genuine desire to find out and factor in the important psychological bits--the what-keeps-you-up-at-night stuff--or the how-will-my-pre-retirement-financial-lifestyle-outlive-my-possibly-30-plus-years post-work dilemma?

Bottom line is in many cases, the promise of a financial plan results in little more than a proposal to have you invest in the firm's specific products, be it mutual funds or insurance.

Part of the problem is that most people have never seen an actual financial plan and are unable to distinguish a quasi-plan from a real one. How sad is that?

The FPSC president, Cary List goes on to say:

"If we're ever going to reach acceptance by clients, if we're ever going to reach a degree of confidence and trust in financial planners that we want to see in Canada, we need to find a way to ensure that when somebody talks about financial planning, we're all talking about the same thing."

Truer words have never been spoken.

Unfortunately, most of you will never have the benefit of such a plan because what it all boils down to would seem that a full financial plan is far too lazily "created" by the average advisor--and in effect, far too complicated for the average client.

Pity eh?

In my next column, I will highlight what you should expect from a financial planner. What a financial plan should include, how it should be presented, and most importantly, how it is implemented.

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