What is a Financial Plan? And Are You Sure You Have One?

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 by assessing your history and current condition and then identifies 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.

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 the recommendations and help you put them in place.

Your plan should 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 focus on how to deduct, diminish, divide, and defer taxes.

6. Estate planning and Legal Aspects

What happens to your money when you die? That's the crux of estate planning. 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, you 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 outlines expectations for 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 alone. 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 won't pursue.

5. Implementation

This is where I most often see plans fail. A plan is not worth much if the recommendations are not completed. It is the implementation of advice that moves you closer to achieving your goals. They may need to refer you to other specialists, including accountants, lawyers, and insurance professionals.

?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, relationship changes, or an inheritance.

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

Does Your Plan Pass the Test?

Not every plan will follow this exact process, and not every plan needs to review all topics at once. 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.

At the very least, you should know if your advisor plans to cover all these topics over time.

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 advice 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?

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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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