Do you feel financially secure? What would it take for you to build a huge nest egg to become financially secure?

Conventional wisdom says it’s mostly about investing better. It suggests you should focus on getting a higher return or lower fees.

My experience, though, is surprisingly completely different. I have seen the full finances of thousands of people. The ones focused on investing usually had small portfolios. I call these people “performance maniacs”. This is a broad generalization with lots of exceptions, but mostly true. They were mostly young guys focused on investment returns, fees, dividends, market timing, the economy, etc. For some reason, the typical portfolios I have seen are only about $25,000.

By comparison, when I met people much less interested in investing with mutual fund portfolios and working with advisors, they tended to have much larger portfolios of $200-300,000. This is partly because they were usually older. However, the comprehensive study by CIRANO1 in 2012 showed people with advisors had 4.2 times more financial assets – after adjusting for age, income, gender and almost 50 other factors.

Investors with Advisors Save MoreMany studies have shown that people working with advisors tend to have much larger investment portfolios, similar to my personal experience.

This difference cannot possibly be explained by higher rates of return. The Ipsos Reid survey (chart 1) shows the longer you work with an advisor, the farther you are ahead of the non-advised. I did the math. It would take a return 10% per year higher to explain this only from investing.2

Key #1: Better saving behaviour

The CIRANO study showed the real secret is better saving behaviour.  People working with advisors had much larger portfolios mainly because they invested more! Those with advisors:

  1. Were more likely to save.
  2. When they saved, it was twice as much (8.6% of income vs. 4.3%).
  3. They invested the savings, leaving much less in cash.
  4. They used RRSPs, TFSAs and other tax methods more effectively.

Financial planning – not investing – is the key to financial security.

This is good news. Saving behaviour is much easier to control than investment returns. The study was clear that saving behaviour was a far more important factor than investment rate of return. “Investment returns, while important, are of limited value ultimately.”3

Key #2: Retirement Plan

The core of a financial plan is the retirement plan. It alone is a huge factor in both achieving financial security and having a large nest egg. Another study “Making a Difference” (chart 2) shows that people working with a financial planner who prepared a retirement plan (Comp Planner) had almost 50% more retirement savings than those working with an investment-focused planner (Planner).

Retirement Wealth with Planner & with Retirement Plan

Do-it-yourselfers benefited even more from a retirement plan. DIYers that estimated their own retirement needs (Self Directed) retired with about 100% more than those that didn’t (No Plan).

The financial industry and the media just give lip-service to financial planning, but my experience and these studies show direct, huge benefits.

Why is having a financial plan, especially a retirement plan, so hugely beneficial? When you have a plan:

  1. You have a clear picture of the future you want.
  2. You know how much to save to get there.
  3. It is important to you, so you find the money to save.
  4. You work towards it consistently.
  5. You are clear on which strategies may fit your plan.
  6. You save tax because it’s obvious whether RRSP, TFSA or other methods are best for you.
  7. You know the return you need, so you may invest less in interest-bearing investments.
  8. You are less likely to get distracted by short-term factors like business news or market crashes.
  9. You think long term.

A retirement plan makes you think long term and puts all your financial decisions in perspective. Whether or not you work with a financial planner, the secret is to have a quality, written financial plan with a retirement plan.

In short, the 2 things you must focus on to achieve financial security are:

  1. Better savings behaviour. Focus on the 4 saving behaviours.
  2. Retirement plan. Develop and follow a retirement plan.

Investing is the last 20% of financial planning. To have the future you want, focus on the 80%.

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